Why Coffee Futures are up 80% in 2014

After commodities had a rough go in 2013, taking the backseat to surging equities, it seems that this year has more favorable conditions in store for a number of hard assets. Though a number of commodities have gotten off to a white-hot start this year, none have even come close to the gains that coffee futures have notched, as that commodity has spiked more than 80% through the first 10 weeks of the year [for more commodity news and analysis subscribe to our free newsletter].

Coffee on the Rise

Futures for coffee are currently hovering at a fresh two year high, as production in the world’s most vital region has spooked investors. Brazil is, by far, the largest producer of coffee on an annual basis. In 2013, the emerging market produced 5,611,584,000 pounds of coffee. For reference, Vietnam had the next closest product which came in at 1,980,000,000 pounds. So when weather issues plague Brazilian crops, it is easy to see why markets can be easily spooked.

While the talking point of the Northern Hemisphere and the US has been a harsh winter filled with bitter temperatures and heavy snowfall, Brazil’s summer has been a hot and dry affair. That combination led to one of the worst drought seen in decades (not unlike the 2012 summer in the US). The drought has damaged coffee crops around the nation and has many concerned that next year’s harvest will be light.

As a result, prices have begun to spike and because Brazil makes up so much of the world’s production, a price ceiling cannot be set on the commodity, allowing it to soar alongside inclement weather. It should also be noted that Brazil leads the world in sugar and orange juice production, though its stranglehold on those two commodities is not a gripping as coffee.

As a result of these harsh weather conditions, a number of commodities have soared on the year, as showcased by the following ETFs:

• Dow Jones-UBS Coffee ETN (JO): This cleverly-named fund tracks front-month coffee futures and has already jumped 88% in 2014.
  
• Pure Beta Coffee ETN (CAFE): Another excellent ticker, CAFE tracks one coffee futures contract at a time, but has a more dynamic roll ability to help avoid contango. This ETN is up 82% in 2014.
• DB Agriculture Fund (DBA): This ETF holds a variety of commodity futures, but its 11.11% weighting in coffee has helped the fund gain more than 18% this year.
• DJ-UBS Agriculture Subindex Total Return ETN (JJA): Last but not least, this ETN maintains a coffee allocation of 8.33% and has returned 16% in 2014.

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Disclosure: No positions at time of writing.