Somewhat quietly, the iPath Bloomberg Coffee Subindex Total Return ETN (NYSEArca: JO) is one of this year’s best-performing commodities exchange traded products and much of JO’s bullishness has been accrued in recent weeks.
Now up more than 18% year-to-date, JO, the larger of the two coffee exchange traded notes (ETNs), is higher by more than 5% over just the past week.
Concerns over coffee supplies out of Brazil may have triggered a short-squeeze in the futures market, forcing large bearish traders to close out positions and buy into the rally. Managed money turned net short on coffee after a selldown of net 21,000 lots over two weeks, Agrimoney reported.
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Brazil is the world’s largest coffee producer and the winter there was colder than expected this year. The impact of more frost than expected in Brazil’s coffee-growing regions still is not clear on this year’s coffee crops.
Supply is always a critical part of the discussion regarding any commodity and the same is true of coffee. The good news for coffee bulls is market observers are forecasting a major supply deficit.
“The International Coffee Organization expects a global Coffee supply deficit of 3.3 million 90-kg bags this season which would be the second consecutive season of a deficit. The outlook for next season is also negative as lower production is expected out of several major Coffee producing nations including Brazil, Columbia and Vietnam,” according to Options Express.
Brazil is the largest exporter of coffee beans. According to the International Coffee Organization, world exports were at a record 111.7 million bags last year, with Brazilian shipments rising 15% to 36.3 million.
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JO, like other commodities products, is benefiting from the slumping U.S. dollar. However, some believe the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, is poised to rebound. That could make commodities ETFs of all varieties vulnerable to some downside.
“Both large and small speculators are currently holding a net-long position in Coffee futures according to the most recent Commitment of Traders report. As of the reporting period ending October 11, the combined speculative position totaled 47,106 contracts,” adds Options Express.
For more information on the coffee market, visit our coffee category.