A coffee-related exchange traded note climbed Friday after coffee futures hit six-week lows.
The iPath Bloomberg Coffee Subindex Total Return ETN (NYSEArca: JO) increased 3.3% Friday after falling 6.7% over the past month. JO has declined 15.2% year-to-date.
Coffee futures have been weakening on increased crop yields out of Brazil, the world’s largest producer of coffee beans.
“The expectation for a bumper 2018/19 Brazil arabica crop could keep futures prices subdued but that crop has yet to flower,” Rabobank said in a market note, adding prices may be volatile during the flowering period, according to Reuters.
Rabobank raised its estimated surplus for the world arabica market for the 2016 to 2017 season by 1.1 million bags to 3.7 million bags, Economic Calendar reports.
Furthermore, foreign exchange fluctuations, notably the U.S. dollar weakening against the Brazilian real, kept Brazilian farmers from selling their beans due to lower profit margins.
However, Rabobank argued that the robust coffee market is “nearly the peak” of an output deficit, and only a “very good” Vietnamese crop could bridge the deficit.
“The robust market will be tight” until supplies from this harvest hit export markets in December, Rabobank said.
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The bank projected that world production for robusta will fall into a deficit in 2017 to 2018 at 2.9 million bags, or 200,000 bags smaller than previously expected, but following on from a deficit fro last season pushed higher to 3.8 million bags, according to Agrimoney.
Meanwhile, robust futures are trading in “backwardation” where nearby contracts trade higher than later-dated contracts, reflecting rising demand for supplies. Consequently, pricing could be volatile if the Vietnamese crop is delayed due to rains, with backwardation steepening.
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