Coffee: Buyer Beware!
What’s the biggest commodity gainer year-to-date?
Natural gas?
Silver?
… nope.
It’s coffee.
The benevolent bean is up an eye-popping 59% since the start of the year. Brazilian drought fears have investors pushing coffee to $1.76 a pound- the highest price since late 2012.
Take a look…
As you can see, coffee has made a parabolic move over the past few weeks. Once investors realized the severity of the Brazilian drought and the effect it will likely have on the country’s crop, they wasted no time pushing the commodity higher.
So is now the time to join in on this bullish party?
No way…
While it’s tempting to try and ride coffee higher, the commodity has already become drastically overbought. As a matter of fact, I told subscribers of my flagship commodity investing service, the Commodity ETF Alert, to sell their position in the iPath Pure Beta Coffee (CAFE) yesterday.
Doing so gave them a cool 45% gain.
As you may know, CAFE is a commodity-based fund that tracks the price of coffee. Investors can trade in and out of CAFE on an intraday basis, just like a stock.
Now let me be clear…
Nobody really knows the true extent of the damage done to Brazil’s coffee crop. The only facts we know at this point is that it’s incredibly dry in the country’s coffee growing regions. According to Brazilian meteorologists, February rains are 80% below average. And that’s on top of the dryness seen in January.
So to say that coffee is ready to fall precipitously would be a bit foolish.
But here’s the deal…
The risks of getting long coffee are currently greater than the potential rewards. Given the remarkable 59% gain this year, the odds of coffee rallying dramatically higher over the next few weeks are slim.
Now, that’s not to say the commodity won’t eventually rally higher. If growers report bigger than expected drought losses, we could see coffee jump into the low $2 range. But the fact is, we’ll likely see a substantial pullback in prices before that happens.
Bottom line…
It’s been one heck of ride for coffee this year. Investors who caught wind of the Brazilian situation early in January are walking away with hefty gains.
But if you’re looking for more easy money out of this commodity, you’re likely barking up the wrong tree.
Until Next Time,
Justin Bennett
***Editor’s Note*** If you’d like to discover how to pull profits out of commodities via ETFs, check out the Commodity ETF Alert today!
Category: Coffee
