Coffee Investment on the Rollercoaster
Coffee may be a mild, strong, smooth, bitter, or sweet drink, but very exciting also as an investment. Players must be strong because of the high volatility, the wide price swings. In the last couple of years, the coffee futures price showed an interesting pattern. Moving in a channel, or as a rollercoaster. Many times it fell below 100 USD but recovered in a couple of months. Reached peaks around $120-$130, and fell again, as in chart 1.
This rollercoaster may be very lucrative for short-term or middle-term traders. The bottom of this channel seems to be strong resistance. Because the coffee price didn’t sink below $87 for approximately 16 years. (Since the end of 2004, see chart 2.)
Reasons to Invest in Coffee
Coffee is a popular consumer product all over the world. The world’s population keeps growing, and his trend is not expected to stop in the coming decades. In emerging countries, more and more people got out of poverty recently, which has increased their purchasing power.
But producers can adapt by applying new agricultural technologies and involving new farmland. The supply and the demand may remain in balance in the long term. In the shorter term, weather events, plant diseases, economic and political problems of the main producers, and foreign exchange rates have a strong impact on the prices. These are the main causes of high volatility. (Main producers are Brazil, Vietnam, and Colombia.)
Spikes and Café Chains
Supply cannot adapt quickly to demand, like in the case of other commodity market products. New investments can only produce output after several years. So, short-term market imbalances cause big spikes in the coffee price.
For the coronavirus crisis, restaurants and café chains are suffering. But the increase in home coffee consumption can make up for some of this. Falling incomes and high unemployment can also cause some decline in consumption. But this effect may disappear with the resumption of economic growth at the end of 2021. (As expected in the markets ultimately.)
Coffee Investment in the Long Term
But woe to the one who keeps coffee investment in the long run. As you see in chart 3, the coffee price moves often in contango. That means far-term settlements are mostly more expensive than near-term ones. That causes a continuous loss for long-term buyers, holders. (Also called rollover loss. I explained this related to crude oil futures, here.)
I found two ETFs buying American type of coffee. These are the WisdomTree Coffee (COFF) in London and the iPath Bloomberg Coffee Subindex Total Return ETN (JO) in the US. Both are lagging the futures price (chart 4). The main reason for this may be the contango. Because of this, hold coffee (or other commodities) in the long term is often a bad idea. But in the case of backwardation (the opposite of contango), we can consider holding coffee futures or ETFs.
Coffee Investment with Stocks
There are many companies related to coffee production, transportation, processing, selling. (See the list of Wikipedia.) But many of them aren’t listed on any stock exchange. And a lot of them have a compound business. They are mixing coffee operations with other food or consumer products, services. A good example is the Starbucks (SBUX) chain, serving you not only coffee but also cookies, sandwiches, other drinks. Coffee Holding Co Inc (JVA) is a more “pure” coffee company.
Other coffee-related, but complex businesses are J.M. Smucker (SJM), Nestlé (NSRGY), and Restaurant Brands International (QSR).
Interesting external readings: