Coffee ETFs to Capitalize on the Surge in Coffee Prices
TrackInsight | Apr 12, 2024 08:35
It feels like everything we adore and rely on to get through the day is getting pricier. Just a few weeks back, we talked about cocoa prices skyrocketing and driving up the cost of our tasty chocolate bars. Now, it's our go-to morning pick-me-up that's on the rise, with coffee futures spiking as well. So, what's causing this trend, and how can we navigate it in the trading arena?
On the demand side, about 3 billion cups of coffee are drunk around the world every day, according to the International Coffee Organization (ICO). If current increased consumption trends continue, this number is expected to double by 2050. Another study by the Columbia Center on Sustainable Investment suggests that we will need 25% more coffee by 2030.
According to the ICO, coffee production has failed to match consumption levels in the past two years, primarily attributed to severe cyclical weather patterns and ongoing impacts of climate change. This has led to a reduction in suitable land for coffee cultivation, posing challenges for growers to sustain their livelihoods and resulting in increased prices for consumers.
Coffee prices have surged recently because severe weather conditions have affected crops in major coffee-producing regions. In Vietnam, a heat wave has prompted farmers to switch to alternative crops like durian, avocados, and passion fruit, leading to a projected 20% decline in coffee exports compared to the previous year.
In Brazil – El Nino phenomenon – a climate pattern that causes global changes in temperature and rainfall – has resulted in substantial rainfall in coffee-growing regions, causing significant damage to the crops.
h2 How to Invest in Coffee/h2Agricultural commodities are volatile investments due to factors like weather, supply and demand, geopolitics, and government policies. This volatility poses risks for investors but offers short-term trading opportunities.
If you're interested in capitalizing on the recent coffee price boom, there are several options to explore. One option for European investors is the WisdomTree Coffee - USD (COFF), which is a UCITS-eligible Exchange Traded Commodity (ETC) designed to provide exposure to coffee futures contracts. It boasts an expense ratio of 0.49%. Additionally, WisdomTree offers another product, the WisdomTree Coffee - EUR Daily Hedged (ECOF), which provides exposure to coffee futures contracts while hedging against currency fluctuations in EUR.
For investors willing to take on more risk in pursuit of potentially higher returns, there's the WisdomTree Coffee 2x Daily Leveraged ETC (LCFE). This product offers leveraged exposure to coffee futures, aiming to deliver returns equivalent to 2 times the daily performance of the Bloomberg Coffee Sub Excess Return Index. For instance, if the index rises by 1% in a day, the ETC would rise by 2%, excluding fees. Conversely, if the index falls by 1%, the ETC would fall by 2%, excluding fees.
Get The App
However, it comes with a higher expense ratio of 0.98%, double its non-leveraged counterpart. For those with even stronger convictions and a higher risk appetite, WisdomTree also offers the WisdomTree Coffee 3x Daily Leveraged (3CFL). This product aims to provide returns that are 3 times the daily performance of the index, excluding fees. Like the 2x leveraged option, it also carries an expense ratio of 0.98%.
These aforementioned products trade on multiple European stock exchanges, with different tickers and currency denominations.
Investors interested in these products should bear in mind that investing in leveraged products entails high risk and is suitable only for experienced investors who understand leverage and are prepared for potential amplified losses.
h2 Is there a Coffee ETF in the United States?/h2In our article titled "Cocoa ETFs to Navigate the Chocolate Crisis", we emphasized the limited access U.S. investors have to cocoa futures markets. Fortunately, they can access exposure to coffee futures through the iPath Bloomberg Coffee Subindex Total Return ETN (JJOFF).
JJOFF is designed to provide exposure to the Bloomberg Coffee Subindex Total Return. The Index reflects the potential returns from investing in coffee futures contracts without using leverage. It currently includes one futures contract on coffee, which is part of the Bloomberg Commodity Index Total Return.
Investors should note that an Exchange-Traded Note (ETN) is a debt security issued by a financial institution, tracking the performance of an underlying index or asset. Buyers of this ETN do not directly own the underlying asset but hold a note issued by the issuer, subject to credit risk.
JJOFF trades on the OTC markets and has an expense ratio of 0.75%.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.