We take a look at key areas of the commodity markets.
[This article originally appeared on HardAssetsInvestor.com and is republished here with permisison.]
There's been no shortage of volatility in commodity markets this year. From coffee's spectacular surge to copper's brutal plunge, there's been ample opportunity to generate hefty returns or losses. Here we take a look at year-to-date performance in a number of the most important commodities and analyze how investors can position themselves to profit in the coming months.
In terms of sector performance, agriculture has been far and away the best performer so far in 2014. Led by coffee—which at one point was up a whopping 95 percent year-to-date—the sector has delivered fantastic returns for investors.
At the heart of the increase in coffee prices has been the severe drought in Brazil. What has been called the worst drought in decades is expected to sharply reduce coffee supplies in the world's largest grower and exporter. Analysts estimate that global coffee supplies may fall short of demand by more than 10 million bags this year—a significant amount in a world that consumes roughly 130 million bags annually.
But are these bullish fundamentals priced into coffee?
Bull case: If Brazil experiences heavy rains this summer during the harvest, the country's coffee yields could suffer more. That would lead to a bigger gap between supply and demand and send prices spiking above $2/lb, perhaps even $3 (where they traded as recently as 2011).
Bear case: On the flip side, the world's second-largest producer, Colombia, is expected to have a stellar harvest, which could help fill some of the gap left by Brazil. At the same time, global coffee surpluses during the past four years have left inventories at comfortable levels. Those could provide a buffer despite this year's expected supply deficit.
Prediction: While it's possible coffee prices may not rally much more from here, it's hard to see them falling back to levels below $1.20/pound where they were at the beginning of the year—at least in the short term. Upside risks outweigh downside risks; thus, investors should take a look at holding coffee in their portfolios. The iPath Dow Jones-UBS Coffee Total Return ETN (JO | B-69) and the iPath Pure Beta Coffee ETN (CAFE | B-97) provide straightforward exposure to coffee futures.