Coffee ETN Percolates on Supply Squeeze

December 10th 2013 at 1:43pm by Max Chen

The coffee market has been under pressure for most of the year on improved crops from Latin American growers, but the coffee exchange traded note was perking up Tuesday after a dearth of robusta coffee fueled demand for arabica-coffee as an alternative.

The iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (NYSEArca: JO)gained 3.5% Tuesday. JO is still down 35.5% year-to-date.

ICE Coffee “C” futures, the world benchmark for Arabic coffee, was up 3.8% Tuesday, trading around $110.1 per pound.

Tight supplies in Vietnam, the world’s largest grower of robusta coffee, helped push robusta prices to their highest level since August, reports Marcy Nicholson for Reuters.

Farmers in Vietnam, who are about to finish their harvest, are holding back supplies to the market in an attempt to boost prices.

“You have a short-term, near-term shortness in the market that is, as we all know, full of supplies and that is what is causing an increase in the nearby premium as well as the rather short warehouse stocks,” Sterling Smith, futures specialist with Citigroup, said in the Reuters article.

The higher robusta prices made low-grade arabic beans more attractive to some U.S. processors as a replacement for robusta beans.

“We had some interest in robustas, but there aren’t many around so the interest turned to under-grade arabicas,” one U.S. importer said in the article.

Robusta is a caffeine-rich bean used primarily in instant coffee and in cheaper blended brewed coffees while arabica is usually found in gourmet roast coffees.

Coffee prices historically follow a seasonal trend where prices often rise in the December month. [Three C’s of Commodities Enter Seasonal Sweet Spot]

Arabic bean prices, though, are still at a five-year low, and many market observers still expect it to retest the low due to a bumper crop year.