Why Commodity Index Returns Can Diverge from Coffee Spot Prices
Summary
The document examines why a coffee-linked index or ETF can perform very differently from the quoted spot coffee price. One explanation is that a futures-based commodity index return includes the effects of rolling contracts: when futures are in contango, moving into a later contract can create negative roll yield, while backwardation can have the opposite effect. Spot price change alone does not capture that component of return.
A second answer points out that the specific index version may be denominated in euros while the cited coffee prices are in US dollars, so exchange-rate movements can also affect the comparison. It cautions that roll effects apply differently depending on whether the index is a spot, excess-return, or total-return variant; one answer argues that the cited index is not an excess- or total-return series. The document therefore highlights the need to check index methodology, currency, and return type before attributing a performance gap to ETF costs. It provides explanations, not a verified decomposition of the full historical difference.
Key ideas
- A futures-based commodity index can diverge from spot prices because rolling futures contracts contributes to returns.
- Contango can create negative roll yield, while backwardation can produce a different roll effect.
- Currency denomination can affect comparisons between an index and a spot price quoted in another currency.
- The relevant explanation depends on whether the specific series is a spot, excess-return, or total-return index.
Tags
Full text
# Why does the coffee price tracking index Dow Jones-UBS Coffee differ so much from the actual coffee price? # Why does the coffee price tracking index Dow Jones-UBS Coffee differ so much from the actual coffee price? I am looking at ETFs that track coffee price indices and I have noticed that there is quite big discrepancy between the ETFs underlying coffee indices (Dow Jones-UBS Coffee is an example) and the actual coffee price. To make it clear, here is the coffee price: https://www.macrotrends.net/2535/coffee-prices-historical-chart-data https://www.investing.com/commodities/us-coffee-c And here is the index price: https://www.investing.com/indices/dow-jones-ubs-coffee If you look at the period from 2001 to 2009 the coffee price grew almost 3x while the index dropped by ca. 30%. Does anybody know where this difference come from. I was thinking that it could be some additional costs to the ETF but the difference seems to big for that. ## Answer by demully (score 3, accepted) https://quant.stackexchange.com/a/47328 Your “coffee price” is spot. Your “coffee index” (or ETF) is excess/total returns, i.e. it includes index rolls. That is the impact of the contango or backwardation of coffee futures as they roll from one contract to the next. See: https://www.bloomberg.com/quote/BCOMSP:IND https://www.bloomberg.com/quote/BCOM:IND Commodity prices are down 10% in 5 years. Commodity returns are down 50%. It’s not just coffee. https://www.investopedia.com/articles/07/contango_backwardation.asp offers an introduction: ## Answer by Jim (score 1) https://quant.stackexchange.com/a/47343 If the Index is priced in EUR based on the methodology, then that has an outsized effect on performance versus spot futures priced in USD. From 2001 to 2009, the EUR appreciated from near parity with the dollar to trading around 1.50 in November 2009. The futures roll returns are not important because that particular index BUKCDE is not an excess or total return index although they do have those versions of the index. Coffee like most commodities is typically in contango so it would have a negative roll yield but this would only apply if we were talking about the excess return version of the index.
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