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The Perk of Investing in This Global Addiction
I was in a mad dash for my car.
Thunder roared through the sky, rain and wind whipped around me, and I wanted to be inside my little red Toyota so I didn’t have to keep trudging around in my rain boots.
But suddenly, a bright green mermaid logo peeked out of the mist on the other side of the car park. And I found myself walking past my car towards the Starbucks beacon.
When the siren song of coffee calls to a caffeine addict like me, well… not even a monsoon will stop me.
And as an investor, it might make you consider the supply-demand story of coffee if you weren’t already.
That’s a smart move at this point.
Yes, coffee has a storied history: It’s one of the most volatile commodities to trade on the US and global futures markets. Each year, sentiment and price are shaped by the weather in key growing regions. When the forecast is correct, and there is no fungal plague ravaging crops, prices are lower.
But then a crucial area of coffee growth is hit by, say, a severe drought, like Brazil – the world’s largest producer, which accounts for more than one third of all coffee supply – in 1986. And rockets price of coffee. (There are additional drivers of volatility, by the way, such as ongoing currency fluctuations.)
In the end, this kind of unpredictable, jerky movement scares investors.
But the truth is, global coffee demand is expected to double by 2050.
Meanwhile, we are on the back of a three-year supply shortage, as key growing regions such as Brazil continue to experience severe and erratic drought.
To top it all off, the genetic diversity of the Arabica coffee bean – the highest quality bean and the main one consumed – is extremely low. That means the plant cannot adapt to changes in the environment quickly enough, underscoring the crop’s tenuous grip on survival.
It’s no surprise that inventories are struggling. The International Coffee Organization expects coffee production to reach a record 153.9 million bags globally for the 2016 to 2017 season which is now ending. But demand is predicted to be 155.1 million bags. That’s a difference of 1.2 million bags.
Yes, much of this information is priced into coffee. But it is clear that the crop is facing an “existential crisis” as Ric Rhinehart, executive director of the Specialty Coffee Association, put it.
And that is the long-term supply-demand story.
I know you’re probably thinking: “That’s all well and good, Jess. But what does this mean for investors in the short term?”
The price of coffee is heating up. The consensus estimate is a further 5% increase for Arabica coffee prices over the next year. But that is being conservative.
As one expert puts it: “The short-term volatility should give us a double-digit move. This is not a huge advantage, but the extreme sentiment and the traders’ outlook are coming together for a solid gain.”
And there are two ways to invest in it: the iPath Bloomberg Coffee ETN (NYSE: JO) and the iPath Pure Beta Coffee ETN (NYSE: CAFE), launched in 2008 and 2011, respectively. If you pick up one of these, cash out after earning 10% or 20%.
With all that said, I think it’s time I went hunting for my next cup of coffee. (Hopefully not in the rain.)
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