☕ Your Guide To Investing In Coffee, The Beverage We All Know & Love
Arabica, Robusta, Liberica, Excelsa. You might’ve encountered these terms during a visit to your local coffee shop or supermarket. These are the 4 main types of coffee beans (out of over 25 different types) produced & consumed in the world, with Arabica accounting for over 60% of the world’s production, and Robusta being the second most produced. A lot of people across multiple industries work in different levels of the coffee economy (farmers, roasters, packers, marketers, coffee machine manufacturers, etc.), with billion of cups of coffee consumed worldwide every year, making coffee an important commodity in the global economy. Also, fun fact: coffee beans are actually seeds in cherry-like fruits.
What Can It Do For You
🧺 Portfolio Diversification. As always, adding commodities to your portfolio can help diversify and lower risk. Adding coffee to your portfolio can be a good way to diversify your portfolio since it acts differently to other asset classes, and even to other commodities.
💰 Profit. Because coffee is known for its volatility, it’s possible to gain decent speculative returns. Investing in coffee (at least for the long term) means you’re confident about increased demand from emerging markets embracing western coffeeshop experiences, growing disposable income in western economies, & supply disruptions due to climate change, crop conditions, or other circumstances. Of course, there will be other factors at play that can lower prices, which results in cyclic price swings that can provide multiple opportunities to enter a trade.
What Affects Coffee Prices
The price of coffee is known to be volatile. There are several key factors that are involved in moving the price of coffee:
- 🇧🇷🇻🇳(🇨🇴🇮🇩🇪🇹) Supply. Brazil accounts for roughly a third of global production, while Vietnam accounts for almost 20%. Add three more countries & the top 5 coffee-producing countries account for almost 75% of the world’s coffee. Any supply disruptions in these countries (due to e.g. political instability like corruption, etc.) can impact coffee prices.
- 🇪🇺🇺🇸 Western Disposable Income. European Union countries & the US accounts for more than half of the world’s coffee consumption. Coffee is not necessarily a staple like rice or wheat, so trends in disposable income & consumer spending can impact coffee prices.
- 🇨🇳 Emerging Market Demand. Coffee consumption in emerging markets (especially China) has grown significantly. The popularisation of western coffee culture (Starbucks 👀) led to China’s own coffee chain version (Luckin Coffee), in addition to becoming one of the world’s highest coffee consumption after the US.
- 🌀 Disruptive Events. Though unlikely, disruptive global events (like the pandemic) can definitely drive down demand or disrupt supplies. Lockdown meant heavy restrictions in coffee chain operations, which impacted the way consumers experience their coffee. Similarly, a disease outbreak (like the Leaf Rust fungal infection for coffee plants) can drastically impact supply.
- 🌧️ Weather. Specific weather conditions must be met in order for coffee plants to thrive. Depending on the type of bean, the plants need the right amount of rain and sun to grow well, otherwise supply might be affected. It might be worth looking at the impact of global warming on these coffee-producing regions.
- 🚢 Transportation & Oil Costs. Coffee producers need to send their beans worldwide. So, shipping costs (especially fuel prices) can have an impact on coffee prices.
- 💵 US Dollar Strength. Like other commodities, the benchmark for the pricing of coffee is in US dollars. A weak dollar compared to other currencies (i.e. need more USD to buy other currencies) may incentivise foreign buyers to buy (since their currencies are worth more in dollars & so can buy more coffee) & drive up demand, increasing prices, and vice versa. Basically, a strong dollar can decrease coffee prices, whereas a weak dollar can increase coffee prices.
The Case Against Coffee
The coffee market is known for its volatility, which may make it hard for short-term objectives. The uncertainty regarding the pandemic & potential future lockdown measures may further dampen down consumer demand and contribute to price volatility even more. The risk of overproduction from the top 5 coffee-producing countries in times of lowered demand may impact prices.
The Case For Coffee
Coffee can still be used to diversify portfolios and can protect against inflation & a weak dollar. For the long-term, global warming & climate change may affect ideal weather conditions that coffee plants need to survive, which may impact crop production. In the short term, more and more reports have come out stating that the Chinese economy has rebounded and that life is returning to normal, which may fuel growth for coffee.
Popular Ways To Invest In Coffee — Pros/Cons of Each
So you can’t really invest in physical coffee since it’s quite impractical. Here are some of the ways you can do so instead. If you’re still confused about how any of these work, refer back to our basics newsletter for a refresher.
- Coffee ETNs. You’re pretty limited here, but you can invest in coffee ETNs (remember, ETNs don’t buy the assets, but instead, pays its shareholders on returns). However, like ETFs, they’re traded on stock exchanges, so they’re very easy to buy and sell. Depending on which broker you go with, you may be charged with trading commissions. ETNs also charge an expense ratio, or management fee that gets taken out of their total holdings and is then reflected on your account. Remember than ETNs have unique associated risks since they’re not dealing with the actual assets. Just be sure to read the fine print.
- Coffee Stocks. These are shares of companies that deal directly in the production and sale of coffee, or companies that serve coffee to customers. Depending on which company you choose, some company stock prices may be more aligned with coffee prices than others. As always, you may want to consider looking at the company’s annual reports (especially operational costs), their production capacity, the number of stores they have, etc.
- Coffee Futures Contracts. A binding agreement traded on futures exchanges between two parties where they agree to buy/sell coffee at a specified time in the future with an agreed-upon price. These futures contracts can be settled with physical delivery or with cash (depending on which exchange you use) after the contracts have expired. The minimum contract size is 10 tons, or about 10,000 kg! Because you are using a significant amount of borrowed money, even small price changes in coffee can either lead to massive profit, or massive losses beyond what you paid for, potentially leaving you in massive debt. They are certainly high-risk and not recommended for beginners. Further, fees associated with futures trading include broker commissions, and exchange/clearing fees.
TL;DR — Is It The Right Investment For You?
As always, it depends on what your aims are. Coffee is known for its volatility, which presents opportunities for speculative profit for more aggressive investors. As a commodity, coffee can also be used to diversify your portfolio & to protect against inflation and a weak dollar. In the short term, uncertainty regarding the pandemic and potential future lockdown measures with stay-at-home measures in bigger importing countries could further dampen demand. In the long term, a number of trends suggests favourable market conditions that could increase coffee prices.
🧺 If you are considering adding coffee to your existing portfolio or bundling it with a number of others, you may want to consider doing dollar-cost averaging (regular investments over time) to build your coffee position so you can take advantage of the volatility in the market.
💰 If you are considering adding coffee for speculation and profit, you may want to monitor the factors that affect coffee prices mentioned above, especially any developments in the emerging markets, most notably, China, crop production in coffee-producing regions (as well as the impact of climate change), as well as developments in coffeeshop chains & the way consumers consume coffee. The International Coffee Organization releases monthly reports on coffee production & imports, so you can stay up-to-date with supply & demand. In addition to monitoring the factors mentioned above, you may also want to consider performing some technical analysis on coffee’s price chart to help consolidate trends and patterns to help with your decision. That being said, its prices can swing unexpectedly due to speculators investing in the market, so be prepared and have an exit plan in place.
As always, if you are unsure, check in with a professional financial advisor before making any moves.