Coffee ETFs have been in the bearish territory since last October on record crop production, lower demand and weak broad commodity fundamentals. However, this trend seems to have reversed in recent sessions on supply concerns in Brazil and Central America.

This is especially true as both coffee ETFs – iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO - ETF report) and iPath Pure Beta Coffee ETN (CAFE - ETF report)– surged nearly 5.4% in Monday’s trading session (read: Can El Nino Boost Agricultural ETFs?).

Some recent reports suggest that the impact of last year’s Brazilian drought could be felt this year and could result in a smaller-than-expected bean size. In particular, the National Coffee Council of Brazil sees around 40 million bags of coffee as compared to the industry forecast of over 50 million bags. Additionally, supply of arabica beans could decline over the next 12 months, as nearly 60% of the Brazilian arabica crop was harvested this year against 80% in the year-ago period.

Though this would not have an immediate impact on the near-term supply, declining inventory levels could jolt supply in the months ahead leading to further surge in coffee prices. Notably, about one-third of the coffee supplies come from Brazil, the world’s biggest producer and exporter. Further, dry conditions across Central America raised worries over supply (read: Can Coffee ETFs Continue to Stimulate Robust Returns?).

All these negative news compelled investors to cut down their short positions for coffee. As per the latest US Commitment of Traders position report, managed money fund sector and non-commercial speculative sector reduced their net “short” position by 21% and 16%, respectively, over a one-week period (ending August 4).

Give assuring fundamentals, investors should take a closer look at the two coffee products. JO seeks to deliver returns through front month coffee futures contracts while CAFE looks to select the futures contracts that best mitigates the impact of roll yield on the underlying investment (see: all the Agricultural ETFs here).

The former has accumulated $116.7 million in AUM while the latter has scanty AUM of $5.6 million. Both products cost 75 bps in annual fees and lost over 25% in the year-to-date timeframe. The duo has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.
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