Soft commodity ETFs surge as coffee and sugar prices jump 20%

Oct 4th, 2016 | By | Category: Commodities

Soft commodity exchange-traded funds and exchange-traded commodities have been given a boost as the price of coffee and sugar has surged following bad weather.


ETFs tracking futures contracts for sugar and coffee have risen sharply in recent months due to supply shortages caused by bad weather in Brazil.

Droughts, heavy rain and frost in Brazil have driven up the prices of both food stuffs by more than 20% in the past few months, according to a note from Rabobank.

Brazil is the world’s largest producer of coffee, and both of its main grower areas, Espirito Santo and Bahia, have been hit by bad weather. The country supplies more than a quarter of coffee in the UK.

Brazil also exports almost three times more sugar than any other country.

The London-traded November futures contract for robusta beans, used to make most instant coffee, has risen since June by one third to $2,027 per tonne on the Intercontinental Exchange.

The $47m ETFS Coffee (LSE: COFF), is up more than 13% year to date and just over 2% in three months in USD terms. The underlying Bloomberg Coffee Total Return Index reflects the movement in the price of coffee futures contracts. It costs 0.49% per year.

Fund provider ETF Securities also has 2x leveraged and 3x leveraged ETPs on the London Stock Exchange under respective tickers LCFE and 3CFL.

Prices, dictated by supply and demand, have also been affected by projected lower coffee supplies in 2017 following recent droughts.

“There has been rain but it’s not enough to repair the damage,” Carlos Mera, a commodities analyst at Rabobank, told the Guardian.

The price of sugar is up 22% since June to roughly 23.5 cents per pound as the crop had to be harvested early in September because of frosts in Brazil.

The $26m ETFS Sugar (LSE: SUGA), which tracks the Bloomberg Sugar Total Return Index, is up 44.6% year to date and just over 10% in the last three months in USD terms.

Sugar prices are expected to remain high amid expectations of a supply deficit in 2017, while stocks of sugar are estimated to fall to six-year lows, according to research and raw materials research firm Mintec.

Bullish investors can either go two or three times leveraged with the ETFS 2X Daily Long Sugar (LSE: LSUG) and the ETFS 3X Daily Long Sugar (LSE: 3SUL).

Sugar and coffee are two exceptions in terms of positive returns in 2016, as ETPs from ETF Securities tracking grains, cocoa, corn and wheat are all in the red year to date.

The broader $239m ETFS Agriculture (LSE: AIGA) has a base currency of USD and tracks the Bloomberg Commodity Index via continuously rolling futures. Top sectors are soybeans (20%), corn (19.8%) and sugar (15.5%), while coffee is sixth on the list at just over 8.5%. In USD terms AIGA has returned 2.4% since 1 January.

There is also a GBP-listed equivalent (LSE: AGAP), which is up over 16% since 1 January. Both swap-backed products cost 0.49% in fees.

Another option is the $5.6m PowerShares Global Agriculture UCITS ETF (LSE: PSUU), up around 1% year to date in USD terms. In GBP, the fund (ticker PSGA) is up more than 16% year to date and just over 6% in the last three months. PSGA/PSUU track 43 agricultural companies, with a roughly 50/50 split between the consumer staples and materials sectors. Archer-Daniels-Midland (8.1%), Monsanto (8%), Agrium (7.8%) and Potash (7.4%) are top holdings. Country-wise, the fund has more than half of its exposure in the US and Canada, as well as smaller allocations in Malaysia (6.9%), Singapore (5%) and Indonesia (4.9%). The fund is physically replicated and costs 0.75%.

An alternative to the PowerShares fund is the $56m iShares S&P Commodity Producers Agribusiness ETF (SPAG). This fund tracks the S&P Commodity Producers Agribusiness Index, a free float market-capitalisation-weighted index offering exposure to approximately 70 of largest publicly-traded companies involved in the agriculture business from around the world and has broadly similar holdings to the PowerShares fund. It is listed on the LSE and has a TER 0.55%.

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