Your Portfolio a Jolt With Coffee Investments
a lot riding on this year's harvest to produce a big
Just as a cup of joe is a good way to
perk up the morning, coffee can also have stimulating
effect on an investment portfolio.
several ways to invest in coffee: the futures market,
exchange-traded notes and publicly traded companies
– and all offer different ways to bet on full cycle
of coffee production, from bean to cup.
in a commodity or a company in the commodity sector
is a little different from investing in other sectors.
People who want to trade commodities must keep a close
eye on what's going on with supply and demand since
it has ramifications down the line.
are down. Like most commodities, coffee prices are down,
with New York futures prices holding just above two-year
lows. Part of that weakness stems from the stronger
dollar. Most commodities are valued in dollars, so when
the greenback is higher, commodity prices will often
fall. Also, coffee supplies are plentiful, which is
weighing on values.
president of Hackett Financial Advisors in Boynton Beach,
Florida, says when Arabica coffee futures prices rose
sharply in 2014, coffee producers sold as much as they
could to take advantage of the higher prices. Brazilian
coffee growers, which are the world's largest producers,
also benefited when the Brazilian real dropped versus
the dollar, making the price they received for java
was willing to destock their entire inventory, so that
kept the market well supplied," Hackett says, even
though the harvests of the past two years were smaller
due to drought.
market flooded, prices fell, with coffee futures prices
trading around $1.17 a pound.
hopes that this year's coffee harvest in Brazil will
be a good one. Brazil's agriculture ministry has forecast
the harvest could be a record high.
in other key-producing areas in Central America look
to be average, Hackett says. However, Robusta coffee
crops in Asia, including Vietnam and Indonesia, are
likely to suffer because of the El Nino weather phenomenon
Robusta are the two main types of coffee beans grown.
Arabica beans have a milder taste, are preferred by
many drinkers and are more highly valued, while Robusta
beans can give a coffee blend more body and increase
the caffeine content.
sold so much of its previous inventory in the past year,
a lot is riding on this year's harvest to produce a
big crop, Hackett says, and that could set up the chance
for a strong price rally if something goes awry during
the growing season.
current crop just keeps them at zero in terms of … stocks,
which is a very dangerous place to be. So if everything
is fine, it's great … but anything tips a little bit,
there's no coffee. There's no way to handle another
problem or perceived problem," he says.
Even if this
year's Brazilian harvest turns out fine, next year's
crop will be smaller because of the way coffee trees
produce. Coffee trees are on a biennial cycle, meaning
they produce a big harvest one year and smaller one
the next year. That means supplies could be tight for
the next two years, he says.
commodity and stock trader at Chicago-based Briefing.com,
says he "really finds it interesting to buy"
coffee now, even though the market is being hit by the
general negative sentiment in commodities.
stocking the pantry, there are two ways to buy coffee
outright. One is the New York coffee futures contract,
and the other is the iPath Bloomberg Coffee exchange-traded
note (ticker: JO). Both Hackett and Ciccarelli recommend
the ETN over futures for retail investors.
it's important for investors to understand that moves
in the coffee market can be sharp and short-lived.
way coffee prices historically have behaved, they move
very, very fast. The entire bull market can be over
in a month or two. If it pops, it just does it overnight,"
thinks coffee prices are set to rally. Vito Sciaraffia,
co-chief investment officer at Texas-based Innealta
Capital, says coffee values will likely be depressed
for another year along with other commodity prices.
But the one advantage coffee has over many other commodities
is "income inelasticity," meaning that people
won't give up their cup of joe, even in hard times.
you're making money, you go to Starbucks, but if you
are price-conscious, you're not going to go to Starbucks
for a $5 coffee," he says.
harvests mean for coffee roasters. Higher coffee prices
can hurt margins at coffee roasters and other companies
that sell the final product, so that's something to
keep in mind when buying coffee companies, Hackett and
says Coffee Holding Co. (JVA) and Starbucks Corp. (SBUX)
are on his "long-term radar" as buys, but
he wants to watch how this year's harvest develops.
If data come out suggesting coffee prices may remain
depressed, he would look at buying JVA and SBUX stock.
future coffee demand has a good future in Asia, where
consumption still remains low. While Starbucks is making
inroads into the region, he still remains hesitant on
buying the stock because of his concerns that coffee
prices may be set to rise.
He also points
out that most coffee drinkers in Asia drink instant
coffee, rather than drip, so he's not expecting an uptick
in coffee-making machine sales there yet. "The
instant coffee side of the equation still has a bright
future. That's where the growth is," he says.
player in the instant coffee sector is Nestle SA, which
trades on the Swiss exchange, but Hackett warns it's
not a pure play. "Nestle dominates instant coffee.
It's obviously well positioned, but they're not a pure
play on instant coffee because they own so many brands,"