According to the U.S. Department of Labor, a one-pound can of coffee was only $3.64 in June 2010. Today, the same can sells for $5.30. And prices are only expected to rise in the coming months.
The reason for the piping hot price: limited supply, coupled with increasing global demand.
Inclement weather in many coffee-growing regions has stunted bean growth, reducing global stockpiles. As a result, stored coffee supplies are now at their lowest level in more than 50 years. And, with the bad weather expected to continue over the coming months, supply may continue to dwindle.
Further fueling the price rise is the increased demand in developing countries, like China and Brazil. As growing numbers of international business travelers and students travel abroad, they return home converted coffee drinkers. As such, Chinese coffee consumption is expected to grow by 15%-20% this year. Similarly, Brazilian consumption is projected to increase by 5% in 2011.
The new supply-demand dynamic means coffee prices could continue to soar in the coming months.
One way to potentially profit from rising coffee prices is to trade a coffee exchanged-traded note, the iPath DJ-UBS Coffee Sub-Index Total Return (NYSE:JO).
As a pure play sub-index, the fund tracks only the futures contract price of coffee, where as many other indexes track multiple commodities. As a result, there is a direct correlation between coffee prices and the fund’s share price. When coffee prices go up, so does the index.
In the past 12 months, JO has returned approximately 62%, while the S&P 500 has returned only about half this, or about 30%.
The fund has an expense ratio of 0.75% which is lower than many other commodity- and agricultural-based securities. It also has a very low beta, or risk ratio, of about 0.44, among the smallest of commodity-based funds.
Technically, the security appears to be signaling a potentially attractive buying opportunity at current levels.
After hitting an all-time high of $81.13 in May 2011, shares sank to a near six-month low of $62.49 in mid-June. On this drop, the fund broke the Major uptrend line that formed off its June 2010 $40 low. A minor downtrend line formed.
Nearly breaching support, marked by the upward sloping 50-day moving average, JO managed to hold on tight. Bouncing off this support level in recent weeks, the fund has once again begun climbing, along with rising coffee futures.
During the first trading week of July, the fund bullishly broke above the Minor downtrend line and is approaching a small shelf of resistance near $70. If this resistance level can be successfully challenged, JO is likely to continue moving higher and could easily surpass its $81 peak from May. At current levels, this represents at least a 15.7% return.
The RSI and Stochastics indicators – which help determine if a security is considered overbought or oversold – are largely bullish.
The RSI trendline, which typically anticipates a security’s bullish or bearish movement, shows an eminent break of the downtrend line. This is a highly bullish sign, indicating the security is likely to rise from here. In addition, it is bullish that RSI has moved above the key 50-juncture.
Stochastics, used primarily to depict if the security is overbought or oversold, shows the fund became deeply oversold, but buying interest is once again on the rise. Buying interest is indicated by the fact the black and red lines are now both close to rising above 20. Additionally, the fact that the black line has crossed above the red line at the key 20 level is very bullish, indicating a significant buy signal.
With strong technicals and a supply/demand situation that favors the coffee prices, look for JO to continue showing upside potential. Investors wanting to jolt up their portfolio may wish to consider taking a long position in the fund.
