By
CommodityHQ
:
By Tony Daltorio
The average coffee drinker probably doesn't realize what a huge
global business coffee is. As one of the so-called breakfast
commodities (along with orange juice, sugar and cocoa), coffee is
the world's most widely-traded tropical agricultural commodity. It
is also the world's second-highest traded commodity, trailing only
crude oil.
Worldwide, more than 26 million small coffee producers in more
than 52 coffee producing countries rely on the beans as their
principal means of earning a living. In North America and Europe,
people consume a third as much coffee as they do water. In the
United States alone, Americans consume 400 million cups of coffee
per day, making it the world's biggest consumer of the
beverage.
Coffee Basics
In the past 12 years, global consumption has increased at an
average of 2.5% annually. In 2011, there were nearly 131 million
bags of coffee exported, weighing over 132 pounds each. However,
demand outpaced supply with consumption of coffee at nearly 138
million bags.
Investors looking to make savvy trades must pay very close
attention to what is going on (such as weather and politics) in the
two largest producers of coffee in the world - Brazil and Vietnam.
For instance, a major frost during the growing season in Brazil can
send prices skyward. The four biggest upward spikes in coffee
prices - 1975-1977, 1985-1986, 1994 and 1997 - were all due to such
an event.
Geopolitics and economics can also come into play. In early
2012, farmers in Vietnam decided to hold back their crop due to low
prices, which in turn, sent robusta prices higher. Or, as also
happened in 2012, a fall in the Brazilian currency (the real)
forced Brazilian farmers to dump their product on the market,
forcing down arabica prices.
The factors that affect the price of coffee fall into four
general categories: weather conditions, geopolitical conditions
(particularly in Brazil and Vietnam), transportation costs, and
consumer discretionary income. Higher oil prices, for example, can
lead directly to higher shipping costs, putting upward pressure on
coffee prices.
Consumer discretionary incomes are also another major factor,
since coffee drinking is not a necessity (at least to most). The
financial and debt crisis in Europe, for example, may adversely
affect coffee consumption in those regions, as individuals will be
more concerned with saving money than spending it on a cup of Joe.
However, rising discretionary incomes in the emerging countries
offer the potential for rising coffee demand overall. Take Brazil,
for example; coffee consumption there is rising quite rapidly.
Forecasts are for demand to exceed 21 million bags annually, up 50%
in the past decade. The arrival of the coffee culture in Asian
countries such as China (with 20% coffee demand growth in 2011) is
another demand driver [see also
How to Trade Coffee Futures
].
Coffee 101
There are several ways to invest in this commodity, including
futures contracts on coffee beans and exchange-traded notes
designed to track the performance of futures contracts.
Coffee drinkers today have a vast array of flavors to choose
from. But there are only two types of coffee beans traded on global
financial markets. The first type of coffee bean is the robusta,
which is considered to be of lower quality and usually ends up as
instant coffee. Most of this variety of coffee is grown in
Southeast Asian countries such as Vietnam and Indonesia and parts
of Africa. It is a hardier bean, and can be grown at altitudes up
to 2,000 feet [see also
Four Little Known Factors Driving the Price of
Coffee
].
The futures contracts for robusta coffee beans are traded on
either the London International Financial Futures and Options
Exchange (LIFFE) or through the Euronext Exchange (symbol RC). The
contract size for robusta is 10 tons and the minimum price movement
is $1 per ton or $10. The delivery months for the contracts are
January, March, May, July, September and November such that ten
delivery months are available for trading. The trading hours are
9:00 a.m.to 5:30 p.m. London time, and the last trading day is the
last business day of the delivery month at 12:30 p.m. London
time.
The second type of coffee bean is the arabica, which makes up
over 60% of global coffee production. This bean produces the better
tasting coffees, such as espressos, that can be found at coffee
shops. It is grown in high elevations, usually above 3,000 feet,
where the coffee develops more slowly and is subject to frosts. It
is mainly grown in tropical countries such as Brazil and
Columbia.
Investors can find the futures contracts (symbol KT) on arabica
coffee beans traded on either the New York Mercantile Exchange
(NYMEX) or the IntercontinentalExchange (
ICE
). The contract size for arabica is 37,500 pounds and the minimum
price movement is $0.05 per pound or $18.75 per contract. The
delivery months for the contract are March, May, July, September
and December. The main trading hours in New York are 3:30 a.m. to
2:00 p.m., and the last trading day is eight business days prior to
the last business day of the delivery month.
Coffee ETNs
Investors can also participate in the up and downs of the global
coffee market through the use of two exchange traded notes (ETNs)
from iPath. The first pure play choice is the iPath Dow Jones-UBS
Coffee Subindex Total Return ETN (
JO
) and is designed to track the movement of coffee futures. However,
there are other risk factors; ETNs expose the investor to credit
risk from the issuer of the note, in this case Barclays Bank.
Another possible risk factor is the shape of the coffee futures
curve.
A second similar ETN from iPath is the Pure Beta Coffee ETN (
CAFE
). The only difference here is that there is no pre-set rollover
schedule for the futures contracts. The fund manager may roll over
into one of a number of futures contracts with varying expiration
dates, as selected using a methodology designed by Barclays [see
also
The Best (and Worst) Commodity Investments of H1
2012
].
Both of these ETNs are traded on the NYSE Arca, making it very
easy for the average investor to access exposure to one of the
world's most interesting commodity markets.
Original Post
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
See also
Draghi Disappoints, But Look Beyond The
Headlines
on seekingalpha.com