Supply Woes Could Caffeinate Coffee ETFs

As the demand for coffee continues to remain insatiable, an imbalance in supply and demand is likely to bolster the price of the soft commodity.

Over the past two decades, the cumulative net deficit for coffee have been satisfied by Brazil’s buffer supply, however, as this supply depletes, there just may not be enough coffee around the world to satisfy demand.  Additionally, reserves held by private roasters are starting to dwindle down as well, as that they are near record lows in terms of historical stock to usage ratios.   In fact, according to the ICE, inventories of coffee have fallen to an 8-year low.

To further add to the supply woes faced by the soft commodity, weather conditions have taken their toll on production.  In Colombia, humid and damp weather is expected to result in curtailed production in the world’s third largest supplier of java.  Severe weather conditions are also effecting production in Africa, as Uganda, the biggest exporter of coffee in the continent, is witnessing a drought which is destroying coffee crop.   

In a nutshell, the rate of change of worldwide consumption of coffee has exceeded the rate of change of production, resulting in a supply and demand imbalance and paving the road to positive price support for the soft commodity.

Some ways to play the coffee market include:

  • iPath Dow Jones-AIG Coffee ETN (JO), an exchange-traded note linked to the Dow Jones-UBS Coffee Subindex Total Return.  JO closed at $46.50 on Monday.
  • PowerShares DB Agriculture (DBA), which allocates nearly 13.9% of its assets to coffee futures contracts.  DBA closed at $25.85 on Monday.

Although supply and demand imbalances indicate that positive price support for coffee is prevalent, it is equally important to consider the risks involved with investing in such a commodity.  To mitigate the downside risk, the use of an exit strategy which identifies specific price points at which an upward trend is coming to an end is important.

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About etftutor
Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton. He is contributing author on The Street - his articles can also be found published on various sites including Yahoo! Finance, The Globe and Mail , Daily Markets, MSN Money, Seeking Alpha, Fidelity Investments, Traders Library, and Minyanville. Prior to this, Mr. Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds

One Response to Supply Woes Could Caffeinate Coffee ETFs

  1. Dragon says:

    I really liked the thesis of this article — that the important metric is your net worth (the one you still track:). As a fellow reformed &#eka0;tr2c28r”, I find I can better use my time to focus on slightly less tactical issues, such as getting better returns.Granular expense tracking and variance analysis IS the best way for a spendaholic to reform his or her ways (besides a series of weekly visits from Gail Vaz-Oxlade and a shaming on national television). But it isn’t essential for a money-smart person to do it. Unless they want to.

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