Coffee-Tied Note’s 95% Return Beats Exchange-Traded Peers

The 94.8 percent return on a coffee-linked note this year is outstripping gains on all other exchange-traded products without leverage globally, as drought boosted prices of the crop.

The security, sold by Barclays Plc and tied to futures contracts for the bean, has risen to $42.28 from $21.70 at the end of 2013, according to Bloomberg-compiled data. A second Barclays-issued note linked to coffee returned 86 percent, surpassing the average 1.9 percent on 947 exchange-traded products worldwide for which the data show year-to-date returns.

Dry spells in Brazil, the world’s biggest producer of coffee, may drive up prices as damage inflicted this year interferes with 2015 production, according to Sterling Smith, a futures specialist at Citigroup Inc. The water shortage has made arabica coffee this year’s best-performing commodity.

“We’re going to have a protracted bull market in coffee,” Chicago-based Smith said in a phone interview on April 21. Investors may favor structured notes to bet on the bean given “you can dial down the size and volatility much easier than with futures contracts,” he said.

Only the BULL VWS X2H (BULLVWS), an exchange-traded product which uses leverage to increase returns and is based on the shares of Vestas Wind Systems A/S (VWS), a Danish wind-turbine maker, surpassed the coffee-linked ETNs. The Copenhagen-listed security returned 95.2 percent this year, the data show.

Coffee futures surged about 92 percent this year as of April 23, the most among the 24 raw materials in the S&P GSCI Spot Index, amid concerns the drought in Brazil will increase crop losses. The futures had fallen in each of the past three years.

Volatility on the futures for the beans surged to the highest since 2000 this week, according to Bloomberg-compiled data. Due to the price swings, coffee futures are “a bad bad boy,” Citigroup’s Smith said. The fluctuations are “more than what most people can handle,” he said.

To contact the reporter on this story: Regina Tan in Hong Kong at rtan87@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net Beth Thomas, Andrew Monahan

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