Since early 2016, the coffee prices have shot upwards by around 12% despite high volatility. For instance, the iPath Bloomberg Coffee Subindex Total Return SM Index ETN (JO) is up by around 11.5%, and the Barclays Bank iPath Pure Beta Coffee (CAFE) is up by around 15.9% since their lows in January 2016. (For more, see: Unique Ways to Profit From Coffee.)
What led to the spike in coffee ETNs, and is there any more upside left?
The Past Factors
The seasaw performance in coffee prices in the recent past is attributed to the global turmoil in the overall markets. The wide swings in the prices of major commodities, like oil and metals, had its impact on the soft commodities, like coffee, owing to the overall correlation factor among various commodities.
Additionally, the 15% appreciation of the Brazilian real (BRL) against the U.S. dollar (USD) since early 2016 has helped boost coffee prices in the international markets. In the past week JO has shot up by 16%, while CAFE moved up by around 9%. The prices strengthened due to recent rainfall reports and its impact in Brazil, the world’s largest coffee-producing nation.
The heavy rains, which continued between May and June, have disrupted the harvesting process of coffee beans leading to estimates of declined coffee production. The same rains have also damaged the coffee beans left for drying in the farms. This has not only contributed to the recent spike in coffee prices, but is also the reason for belief in a sustained rally. (For more, see: 4 Best Coffee Stocks for 2016.)
However, a few counter views exist that question the sustainability of momentum in coffee prices.
One opinion is that the effect of rainfall is already factored into the coffee prices, as the heavy rains have continued since before the month of May. Due to this, suspicions of declined productions are already factored in, and any further price rise is not possible. There are other forecasts that coffee produce in Brazil will increase by 13% to hit a record high, and the negative impacts of heavy rainfall are overblown. Additionally, prices are expected to consolidate at international levels as Colombia has already reported increased production by 7%, which is expected to further rise to 10% by the end of this year.
The Bottom Line
While coffee prices have risen sharply in recent times, they were dominated by high volatility and future predictions. Prices of agro-produce are heavily dependent on supply, and recent reports, forecasts and determining factors indicate that the coffee rally may not be sustainable any longer. (For more, see: The Perks of Trading Coffee Options.)