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Weak Real Helps Brazilian Exports But Weighs on Coffee ETNs

With the real currency depreciating, Brazilian farmers are dumping harvests on to the global markets, putting further pressure on the coffee prices and related exchange traded notes.

The iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN (JO) declined 4.6% Monday while the iPath Pure Beta Coffee ETN (NYSEArca: CAFÉ) decreased 2.8%. Year-to-date, JO fell 20.4% and CAFE retreated 19.2%.

ICE coffee futures were down 3.8% to $1.33 per pound Monday.

Despite the falling coffee prices, Brazilian farmers continue to export more of their stockpiles as the Brazilian real deprecated almost 20% against the U.S. dollar, near an 11-year low, reports Emiko Terazono for Financial Times.

The WisdomTree Brazilian Real ETF (BZF) , which follows real currency movements against the USD, is down 16.0% so far this year and 22.8% lower over the past year. The real currency and related ETF have declined in response to a weakening economic outlook and corruption charges surrounding Petrobras, the multinational energy company. [Brazilian Bungle: More New Lows for Brazil ETFs]

“Brazil’s weaker currency is giving a big boost to Brazilian exporters,” Michael McDougall of commodity brokers Newedge said in the FT article.

Since coffee beans are priced in U.S. dollars, Brazilian farmers are selling more abroad to capitalize off the strong U.S. dollar and weak real currency, even though coffee prices continue to decline. Consequently, while coffee prices have declined in dollar terms this year, the market is up 3.4% in Brazilian reals.

Brazil is the largest exporter of coffee beans. According to the International Coffee Organization, world exports were at a record 111.7 million bags last year, with Brazilian shipments rising 15% to 36.3 million.

Looking ahead, Commerzbank expects the Brazilian real currency, citing “prolonged weakness of the real due to the weak macroeconomic fundamentals, the complicated political situation and the social unrest.”

The continued weakness in the real could further support Brazilian exports and keep pressure on the coffee market.

iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN

JO_ETN
JO_ETN

For more information on the coffee market, visit our coffee category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.