Q&A With Gordon Pape: The Volatility Of Coffee

Is this coffee ETF a good idea?

Q – I put $15,000 in the iPath Bloomberg Coffee ETF when it was $22 after it had fallen considerably from its high. It is now in the $17 range. I thought it would be a no brainer, given that coffee consumption keeps increasing, and coffee bean blights are affecting growth and production in many world markets. Totally confused on this one. Help, if you can. – Norman O.

A – For starters, I never recommended this ETF. Single commodity plays are risky, being highly dependent on the price of the underlying product.

That said, this ETF looked like a good bet at the start of the year. Bloomberg reported in February that coffee prices were expected to increase in 2017 due to a drought in Brazil (the world’s number one producer) and heavy rain battering the crop in Indonesia and Vietnam.

However, it hasn’t worked out that way. After hitting a peak for the year of US$1.60 per pound in February, coffee future prices have been steadily treading down and were sitting at about US$1.25 at the time of writing. Higher exports from other coffee-producing countries was one of the reasons for the decline.

I am not an expert in coffee prices so I cannot predict what the price of the commodity will do now. History shows this is a very volatile product. Over the past decade the price touched a high US$3 a pound in early 2011 and dropped as low as US$1.05 in late 2014. So there appears to be more upside than downside at present, if that is any consolation. – G.P.


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