Rising coffee prices are spiking interest in this exchange traded note.
iPath DJ-UBS Coffee TR Sub-Idx ETN (JO)
from Stock Trader’s Almanac
Coffee has increased in popularity on an international scale in the last few decades. Most consumption has been from the United States, parts of Europe, and Canada. Many Europeans have switched from tea to coffee and with the introduction in late 2005 of Starbucks coffee in Europe and in Asia. Demand is improving, especially for higher grade and quality coffee. With increasing global consumption habits, if there are threats of supply disruptions or production declines for higher grade coffee, the futures market can be prone to extreme price moves. One such move was earlier this year when coffee surged nearly 100% in about three months due to drought conditions in the major producing areas in Brazil. These conditions have not eased and production and quality are projected to suffer this year and possibly even beyond which should set a floor under coffee prices for some time to come.
Outside of the futures market several choices exist to trade coffee’s seasonal move. PowerShares DB Agriculture (DBA) [an existing position in the ETF Portfolio] offers some exposure to coffee with approximately 12.47% of its assets being coffee futures. However, iPath DJ-UBS Coffee TR Sub-Idx ETN (JO) is a better alternative. Unlike an ETF, JO is an exchange-traded note that is designed to track the DJ-UBS Coffee Subindex Total Return, which reflects the potential returns available through an unleveraged investment in futures contracts on coffee. JO has sufficient liquidity trading around 100,000 shares per day over the past three months with a market capitalization just under $100 million.
A long position in JO could be considered on dips below $35.60. If established, a stop loss at $31.98 is suggested. For tracking purposes, this trade idea will appear in the Almanac Investor ETF Portfolio.
Jeffrey A. Hirsch, Stock Trader’s Almanac, www.stocktradersalmanac.com, 800-762-2974, August 12, 2014