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Analysis on Coffee (JO)

April 22, 2013

By Gulshan Malhotra

Overview

“iPath DJ-UBS Coffee Sub-index Total Return SM Index ETN” (hereafter “JO”) is an investment seeks to replicate, net of expenses, the Dow Jones-UBS Coffee Total Return Sub-Index. The index is intended to reflect the returns that are potentially available through an unleveraged investment in coffee future contracts as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.

The closing price for the stock of JO as on April 19, 2013 is $30.72. In this analysis, we are not considering just 52 Weeks’s history, but 5 year’s history as well. The purpose to consider 5 year’s history is to accommodate the lows and highs of the business cycle.

Stock Exchange Info

JO is listed on Dow Jones (NY) with ticker “JO”. It is an ETF (Exchange Traded Fund) which follows Dow Jones-UBS Coffee Total Return Sub-Index. Its category is Agriculture
under Commodity.

Historical Analysis

Chart 1 : 5 Years Analysis

Chart 2 : 52 Weeks Analysis

If we look at the 52 week’s pricing trend, low is $28.82 and high is $46.01.The current price is towards the lower side based on 52 week’s price range. If we look at the 5 years pricing trend, the low is $28.82 and the high is $81.12, the current price is again towards the lower side based on 5 years price trend. This indicates that it is a good entry point. (See chart 1 and 2)

Table 1: High / Low Prices

Coffee

Chart 3: Coffee production countries

Coffee is one of the most widely traded commodities in the world. There are two types of coffee plants Arabica and Robusta. 80% of the total world coffee production is Arabica and the balance 20% is Robusta. The caffeine content in Arabica beans is 0.4% – 1.6%, while Robusta beans have 1.7% – 4.0% of caffeine content . Since Robusta type contains high caffeine, it is used as a flavor.

Coffee is produced in over sixty countries. Many of these sixty countries are deeply dependent on coffee. This created a need to consolidate, structure and control the coffee business. So, the International Coffee Organization (ICO) was set up in London in 1963 with the help of the United Nations because of the great economic importance of coffee. The ICO’s mission is to strengthen the coffee sector and promote its sustainable expansion in a market-based environment for the betterment. Its Member Governments represent 97% of world coffee production and over 80% of world consumption. Brazil is the leader with producing 35% of the total world production of coffee. Brazil, Vietnam, Colombia and Indonesia combine together produce 74% of the total world production (chart 3). Europe, USA and Brazil are the big consumers of coffee. Europe consume 34%, USA consume 18% and Brazil consume 15% of the total coffee consumption.

Reason for fall / spike in the price of stock

Table 2: Coffee spot price

The main driver for JO is the coffee price. Coffee price, for 5 year high is $231.2, 5 years low is $107.7 and current is $131.4. If we assume that the normal spot price is the mean of high / low of 5 years, i.e., $169.5 and is normalized to current period, the current spot price is 29% lower than the normal price. This indicates that there is a potential for increase in the spot price. (See Table 2)

Note: Prices are based on average monthly price during the season which is Oct to Sep.

Chart 5: Coffee price trend

Further, if we see the five year price trend, the prices are in lowers range. When we draw liner line on the price the trend shows that the normal price is around $160.

If we evaluate from volatility point of view, current price is in the middle of the lower range and in entry zone (Chart 6).

Chart 6: Coffee spot price 5 years trend

Chart 7: Coffee total world production and price trend

When we see the price and production trend, there is no real relationship of price and production. Since coffee demand in last five years has increased exceptionally, there was a bumper extra ordinary harvest for 2012 which lead to 2013 prices of coffee, which is considered temporary in my opinion. Finally, all the indication is that the current price of coffee is lower than the real price of coffee.

Also, in the 1st quarter of 2013, there was a news that a bean-destroying fungus is increasing across another important coffee-growing region, Central America. Honduras, Guatemala and Costa Rica are all expecting substantial drops in coffee production due to the bug. And those drops possibly will be felt market-wide by October, when the next coffee season starts.

Volume analysis

Average daily volume is 87.8k shares, which is equivalent to $2.6M based on the current price. This means that the deals that are equivalent to average $2.6M, complete in one day. The maximum level of $26k is suggested for the investment to keep the liquidity high.

Options Price Analysis

N/A

Valuation of the stock

N/A

Exchange Traded Fund (ETF) Info

Total Net Assets of the JO is $100M and Total Net Assets Value is $30.77. Actual Management Expenses Ratio is 0.75.

Risk / Opportunity

Risk vs. Opportunity ratio may be defined as the comparison between the strength of the opportunity and the risk involved in the investment. For JO, the opportunity is 8x of the risk based on 52 week’s analysis and 26x based on 5 year’s analysis. (See chart 1 & 2)

Price Earnings Ratio

N/A

Dividend Yield

N/A

Conclusion

Based on the above analysis, it is worth investing in JO. The value of the investment is less risky than the opportunity available.

Related Links

http://en.wikipedia.org/wiki/Coffee

http://databank.worldbank.org/data/views/reports/tableview.aspx

http://www.indexmundi.com/world/inflation_rate_(consumer_prices).html

http://money.msn.com/now/post.aspx?post=c681e133-5dec-4a90-97d6-f8c45809e57c

http://www.indexstrategyadvisors.com/insights/2011/12/page/2/

2 Comments
  1. April 23, 2013 5:12 AM

    Im so grateful that you posted this. Thanks.

  2. April 23, 2013 11:08 AM

    Proud of you for your hard work ——– pooja

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