Jolt Might Be Brewing for Coffee ETF

It may be that rare investment that’s right under your nose. 

Java, joe, bean juice, whatever. Coffee is the world’s most popular drink after water, and, according to the National Coffee Association, is responsible for 1.6% of total U.S. gross domestic product. 

Not only does demand not change much due to prices, supplies are threatened by global warming and extreme weather. Things could get jittery in the bean market. 

Arabica, Robusta 

Arabica coffee beans are most common in the U.S., but robusta beans produce espresso and Turkish coffees with higher caffeine content.  

Source: visualcapitalist.com 

While Brazil is the world’s leading producer and exporter of Arabica beans, Vietnam has led the world in robusta bean production and exports.  

The iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO) tracks the price of Intercontinental Exchange coffee futures that trade in the soft commodities sector of the raw material asset class.  

Arbacia coffee futures are highly volatile, as the weather in critical growing regions, crop diseases and logistical factors can impact the flow of the beans from Brazil to worldwide consumers.  

Coffee futures fell below $1 in June 2020 and rose to $2.6045 per pound, the highest price since 2011 in February 2022. While coffee futures corrected from the early 2022 high, the price remains elevated at above $1.80 per pound as the soft commodity consolidates after reaching the multiyear peak. Meanwhile, robusta prices have risen to record levels, putting upward pressure on Arabica prices.  

Volatility in Arabica Futures 

Arabica coffee futures trade on the Intercontinental Exchange.  

Source: Barchart 

The chart highlights coffee futures’ volatility. After falling to a 14-year low in April 2019 at 86.35 cents per pound, Arabica coffee futures exploded to an 11-year high at $2.6045 per pound in February 2022.  

The midpoint of the move is at $1.7340, and nearby coffee futures corrected to $1.4205 in January 2023 before recovering over the midpoint to the $1.8160 per pound level on May 26, 2023.  

Record Robusta 

While Arabica futures declined from the 2022 multiyear high, robusta futures soared.  

Source: Barchart 

The chart shows the rally in robusta coffee futures that took the price to a new peak in May 2023. Vietnam cut back on its coffee cultivation area, with farmers planting more passion fruits and durian. Robusta coffee’s supply issues translate to increased demand for Arabica beans and higher prices.  

Inelastic Demand 

Coffee demand is not highly sensitive to bean prices. Anyone who frequents Starbucks or other coffee shops in the U.S. and worldwide knows the markup on a cup of java is significant, making coffee inelastic to bean price increases. Moreover, coffee’s stimulative impact on the human body is why higher prices will not cause consumers to forgo their daily caffeine dose.  

Brazilian Arabica production is critical for world supplies. Weather issues can cause widespread crop losses and deficits in coffee supplies. Moreover, fungal crop diseases like root rot and leaf rust can wipe out an entire crop. Inelastic demand and the potential for crop-destroying diseases make coffee prices highly volatile.  

Post-Consolidation Rally? 

After falling from $2.0645 in early 2022 to $1.4205 in early 2023, nearby ICE Arabica coffee futures have consolidated from $1.70 to $2.00 per pound. The decline to a 14-year low and rise to an 11-year peak has caused coffee to trade in a band, mainly above the midpoint of the 2019 low and 2022 high.  

While coffee will likely remain in the trading band over the coming weeks and months, the robusta shortage and high prices suggest the trading range will eventually resolve to the upside.  

JO Is the Coffee ETN Product 

The most direct and liquid route for a risk position in coffee is through the ICE Arabica futures and futures options. Meanwhile, the iPath Series B Bloomberg Coffee Subindex Total Return ETF product (JO) does an excellent job tracking Arabica coffee futures prices.  

At $53.05 per share on May 26, JO had $26.34 million in assets under management. JO trades an average of 8,391 shares daily and charges a 0.45% management fee.  

Nearby coffee futures rose 181% from the June 2020 92.70 cents low to the 2022 high and corrected 45.5% to the 2023 low.  

Source: etf.com

JO rose 142% from $29.20 in June 2020 to $70.55 in February 2022 and corrected 42% to $40.75 per share, the early 2023 low. JO can miss highs or lows when the U.S. stock market is not operating as coffee futures trade in the early morning hours.  

If bullish percolation is on the horizon in the ICE coffee futures arena, JO is an alternative that will follow the soft commodity higher or lower over the coming months.