The coffee market and related exchange traded notes have experienced wild swings this year as a drought ravaged Brazilian crops, the largest producer in the world, and prices have further room to jump higher as crop conditions could be worse than many fear.
Coffee has been the best performing agricultural commodity this year, with the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (JO) up 60.0% and iPath Pure Beta Coffee ETN (NYSEArca: CAFÉ) up 55.7% year-to-date.
ICE coffee futures are trading around $1.85 per pound.
“Given the unprecedented drought, industry and trade have had to increase knowledge about moisture deficits and the impacts on plants,” Keith Flury, head of research at Volcafe, the coffee division of commodities traders ED & F Man, said in a Financial Times article.
As the Brazilian coffee industry grows, farmers have moved toward the equator where heat and dry weather conditions are a growing concern.
“Because there has never been a drought in January, February and March in living memory, there is huge uncertainty,” James Hearn, co-head of agriculture at commodities brokers Marex Spectron, said in the article.
Looking ahead, coffee experts argue that the damage at the start of the will have a negative effect on future crops. Specifically, the drought hampered growth of branch nodes that produce flowers and the dry weather has also damaged roots of some trees.
Additionally, unseasonal precipitation over the past month has led to early flowering in coffee trees, which would affect next year’s output. Historically, the main flowering period in Brazil is in October and November after the September rains.
“There are market participants who don’t really realize the extent of the damage. Some are in denial,” a specialist at a large coffee merchant said in the article.
iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN
For more information on the coffee market, visit our coffee category.
Max Chen contributed to this articlei.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.