Coffee’s up over 20% year-to-date, but its gains weren’t meant to last

Jodie Gunzberg, vice president at S&P Dow Jones Indices, pointed out in a recent blog that coffee is actually the best performing commodity this year, but it’s destined for a price plunge over the next few years if history repeats itself. As one of the commodities in the S&P GSCI XX:SPGSCI and DJ-UBS Commodity Index XX:DJUBS, coffee has gained 23.9%, she said on Tuesday. Gunzberg attributed the rally in the commodity to expectations that consumption in China will grow by an annual rate of 9% for the next five years, as well as to dry weather in Brazil. Futures prices for coffee closed on Tuesday at their highest level since May. March Arabica coffee CH4 was last at $1.40 a pound, up nearly 2 cents, or 1.9%, on the ICE Futures U.S. exchange. But Gunzberg said that the roughly 30% increase in coffee prices since October of last year “could be a head fake.” “If the next drawdown looks like the past, it is possible to see a downward spiral for another 2.5-3 years with a loss of 58.6%,” she said. Here’s the explanation from her blog: “Historically, the major drawdowns have lasted on average about 5.5 years with a loss of 81.1%. The gains from trough to peak on average with the exception of the 2008 financial crisis period lasted 4.8 years with average gains of 387.1% — that includes the gain between 2001-2011. The last drawdown ending 10/31/2013 only lasted 2.5 years and was only down 64.8% before gaining 30.1% until now.”