The iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO) is down 2.7% over the past month, a showing that is not too shabby relative to other commodities exchange traded products. However, investors should proceed with caution in the volatile coffee space.

For commodities investors, the bad news is that coffee’s slide shows no sign of abating and professional speculators are not waiting around for the commodity to rebound. On the other hand, a sharp change in weather conditions in the world’s major coffee-producing countries could catch coffee bears off-guard, leading to a rebound.

If the last El Niño is any indication, nonfuel commodity prices could rise in the months ahead. According to the International Monetary Fund, nonfuel commodity prices jumped an average 5.3% in the 12 months following the announcement of an El Niño event as the threat of lower production brought on by inhospitable conditions weighed on prices.

“It does appear that the world may be heading toward a deficit year, but the demand side of the equation could be a problem.  China, India and Brazil have been a major driving force for Coffee demand, as those countries’ tastes grow increasingly Western. The recent economic headwinds faced by the BRIC countries could result in demand failing to meet these projections,” according to Options Express.

Late last year Bloomberg reported professional money managers have been bearish on coffee futures for 18 consecutive weeks.

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