5 Reasons You Might Invest in Coffee
There are several compelling reasons traders might consider investing in coffee:
- Bet on Supply Scarcity
- Bet on Global Growth
- Bet on Improving Health Story
- The Starbucks Effect
- Portfolio Diversification
Can You Hedge on the Supply Scarcity of Coffee?
Coffee has its source of supply concentrated heavily in a few countries. Since coffee growing requires the right climate and financial resources, this concentration is unlikely to change anytime soon. Conditions such as climate change and political upheaval have the serious potential to disrupt the supply of the crop and send prices higher.
Bet on Global Growth
As a discretionary item, coffee benefits from strong global economic growth.
Investors optimistic about growth in emerging economies in Asia, Latin America and Africa may want to invest in coffee. As these countries accumulate wealth, their consumption of coffee is likely to increase. Similarly, investing in coffee is a way to bet on growing discretionary income in Western economies.
Bet on the Increasing Health Benefits of Coffee
Medical evidence paints an increasingly favorable picture of the health benefits of consuming coffee. If more medical evidence emerges about these benefits, then consumer behavior may shift toward greater consumption.
The Starbucks Effect on Coffee and Investments
Consumers increasingly see coffee shops as fun and productive places to congregate. Business professionals, students and civic groups perform work and hold meetings in them. As coffee shops proliferate in popularity, coffee consumption should benefit.
Diversify Your Investment Portfolio
Most traders have the vast majority of their assets in stocks and bonds. Investing in coffee is one way to diversify a portfolio.
Should I Invest in Coffee?
Coffee prices can be very volatile, so traders should take that into account when deciding whether or not to invest.
An investment in coffee might make sense as part of an overall plan to allocate some assets to commodities. Commodities provide traders with protection against inflation and a declining US dollar. They also provide traders with asset diversification.
There are three compelling long-term trends that could boost coffee prices specifically:
- Global Climate Change: Coffee might be a way to profit from long-term shifts in weather patterns. Increasingly hot temperatures and unpredictable hurricane seasons could create upheaval in the production of many crops including coffee.
- Emphasis on Healthy Living: Studies in the medical community continue to show more benefits from coffee consumption. This news has the potential to convert more individuals into coffee drinkers and drive coffee prices higher.
- Emerging Market Growth: Rising wages in emerging economies have the potential to transform consumption patterns. Discretionary items such as coffee could be the beneficiaries of this trend.
However, coffee investing has several risks as well:
- A strong US dollar could drive prices lower
- Overproduction by large suppliers could depress prices
- Economic weakness, in general, could curb consumers’ appetite for coffee
What Do the Experts Think About Coffee?
Experts see favorable supply/demand fundamentals boosting coffee prices. They see weak harvests of Arabica beans and increasing demand for high-end gourmet coffee as the drivers of this trend.
We expect prices to hit further highs on production downgrades, the decline in global stocks and supply tightness that should keep markets fearful of any disruptions.
-Sudakshina Unnikrishnan, commodities analyst at Barclays Capital.
James Hearn, co-head of agriculture at commodities broker Marex Spectron, agrees. He believes that low Arabica prices fail to take into account the impending shortage.
It’s a material deficit; everyone can see there’s a problem coming.
-James Hearn, co-head of agriculture, Marex Spectron
Hearn notes that crop conditions in Brazil and tight demand have the potential to lift prices much higher. He points to the Brazilian government’s sale of its supply, which was met with strong market demand. As government supplies get depleted, the potential for higher prices increases.
How Can I Invest in Coffee?
Coffee traders have several ways to invest in the commodity:
Coffee Trading Methods Compared
|Method of Investing||Complexity Rating (1 = easy, 5 = hard)||Storage Costs?||Security Costs?||Expiration Dates?||Management Costs?|
|Coffee ETFs (ETNs)||2||N||N||N||Y||N||N|
The New York Mercantile Exchange (NYMEX), which is part of the Chicago Mercantile Exchange (CME), and the Intercontinental Exchange (ICE) offer the Coffee C futures contract, which is the world benchmark for Arabica coffee.
The Coffee C contract settles into 37,500 pounds of Arabica beans. The CME contract trades globally on the CME Globex electronic trading platform and has expiration months of March, May, July, September and December.
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are financially settled on the NYMEX but physically settled on the ICE.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
Coffee Options on Futures
The ICE offers an options contract on the Coffee C futures contract.
Options are also a derivative instrument that employ leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.
Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of Coffee C futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in Coffee C futures to profit from their trades.
These financial instruments trade as shares on exchanges in the same way that stocks do. An ETN is similar to an ETF except that instead of holding the assets in a fund, it pays traders returns on the portfolio of assets. In this sense, it is more like a bond. There are two popular ETNs that invest in coffee futures:
Top 2 Coffee ETFs
|iPath Dow Jones – UBS Coffee ETN||iPath Pure Beta Coffee ETN|
Shares of Coffee Companies
There are few pure-play public companies engaged in the production and sale of coffee. Most coffee producers are small and privately-owned. Investors could purchase shares of one of India’s largest coffee producer Tata Coffee Ltd (TCO.IN).
One way to invest in coffee is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of coffee. The value of a CFD is the difference between the price of the shares at the time of purchase and the current price.
Many regulated brokers worldwide offer CFDs on coffee. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that traders can have exposure to coffee prices without having to purchase shares, ETFs, futures or options.
- No commission on trades (other charges may apply)
- Free demo account
- Easy-to-use (mobile-friendly) platform
- Industry-leading risk management tools
- Trade coffee and hundreds of other CFDs
- Your funds are safe – publicly listed company regulated by the UK's Financial Conduct Authority and Cyprus' Securities and Exchange Commission
Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.