Coffee prices are percolating.
So far this year, the price for arabica coffee beans nearly doubled in price.
After hitting a two-year high, arabica coffee futures – traded on the Intercontinental Exchange (ICE) – have come down to around $1.75 a pound.
But don’t expect the pullback to last very long.
Mother Nature may be affecting the growth of these beans and, therefore, the prices, in a few different ways.
Price Driver #1: La Roya
A coffee leaf rust – which translates to “la roya” in Spanish – is taking its toll supply.
This yellow- and orange-colored fungus grows on leaves and chokes off nutrition for the coffee cherries that encase the beans.
The U.S. government estimates la roya has already caused $1 billion in economic damage worldwide since 2012.
In fact, la roya quickly became a curse term in coffee-growing regions, from Mexico to Peru. This year it’s estimated that it’ll cause $500 million in crop damage (a loss in excess of 15% of the crop), and will cost nearly 375,000 jobs.
Coffee rust is such a significant problem that the U.S. Agency for International Development recently announced it will spend $14 million to fight the disease.
The fungus may be difficult to overcome, however.
It’s predicted to be an even bigger threat next year as the fungus spreads.
Once la roya spreads to half of a tree’s leaves, the tree will have to be cut down to the stump, and won’t produce coffee beans for three years.
Now, planting coffee rust-resistant trees is a solution, but it would also inhibit coffee bean growth.
Price Driver #2: Brazil Drought
Mother Nature is also at work in Brazil in the form of a severe drought.
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Brazil is a key coffee producer. Its fertile soil produces about one-third of the world’s coffee, and more than half of the world’s Arabica coffee beans.
But dry weather stunts the growth of coffee cherries. And the latest Brazilian government forecast on its Arabica bean crop puts it at only 44.57 million 60-kilogram bags.
That’s down about 9% from its previous forecast. Last year, Brazil produced 49.15 million bags of Arabica coffee beans.
A Look Ahead and a Coffee Investment
Overall, the world will face a shortage this year of between seven million and 11 million bags of Arabica coffee beans. That would represent the largest deficit since the 2009-2010 season.
To top it off, most industry observers believe that the drought in Brazil is severe enough to affect next year’s crop, as well.
La roya won’t disappear by next year either. So it’s likely that the deficit in arabica coffee beans will continue to grow.
One great way to play rising arabica coffee futures prices is through the purchase of an exchange-traded note (ETN) like the iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO).
The ETN, issued by Barclays Bank (BCS), is designed to track the performance of the current coffee futures contract.
Year-to-date, this ETN has returned 81%, and its yearly fee is only 0.75%.
This more than offsets any rise in price for your cup of joe.
And “the chase” continues,