I was in a mad rush for my car.
Thunder roared in the sky, rain and wind surrounded me, and I desperately wanted to be inside my little red Toyota so I wouldn’t have to keep crashing into my rain-soaked shoes.
But suddenly, a bright green siren logo appeared in the haze across the parking lot. And I found myself in front of my car heading for the Starbucks beacon.
When the siren song of the cafe calls for a caffeine addict like me, well … not even a monsoon will stop me.
And as an investor, this might lead you to consider the history of coffee supply and demand if you weren’t already.
It’s a smart decision right now.
Yes, coffee has a turbulent history: it is one of the most volatile commodities to trade in the US and global futures markets. Each year sentiment and prices are shaped by weather conditions in major growing regions. When the forecast is good and there are no fungal plagues ravaging the crops, the prices are lower.
But then a critical area of coffee growth is hit by, say, a devastating drought, such as Brazil – the world’s largest producer, accounting for over a third of all coffee supply – in 1986. And coffee prices are skyrocketing. (By the way, there are other factors of volatility, such as persistent currency fluctuations.)
Ultimately, this type of unpredictable, jerky move scares investors.
But the point is, global demand for coffee is expected to double by 2050.
Meanwhile, we’re on the back of a three-year supply shortage as critical growing regions like Brazil continue to experience severe and irregular drought.
To top it off, the genetic diversity of the Arabica coffee bean – the highest quality bean and the main one consumed – is extremely low. This means that the plant cannot adapt quickly enough to changes in the environment, underscoring the fragility of the crop’s hold on survival.
Not surprisingly, stocks are struggling. The International Coffee Organization expects coffee production to hit a record 153.9 million bags worldwide for the ending 2016 to 2017 season. But demand is forecast at 155.1 million bags. That’s a difference of 1.2 million bags.
Yes, much of this knowledge has been incorporated into the coffee. But it is clear that the culture is facing an “existential crisis” as Ric Rhinehart, executive director of the Specialty Coffee Association put it.
And this is the story of long-term supply and demand.
I know you’re probably thinking, “That’s all well and good, Jess. But what does this mean for short-term investors?”
The price of coffee is heating up. The consensus estimate is a further 5% increase in Arabica coffee prices over the next year. But it is to be conservative.
As one expert puts it: “Short term volatility should give us double digit move. It is not a huge gain, but extreme sentiment and traders’ expectations are lining up for a solid gain.”
And there are two ways to invest in it: iPath Bloomberg Coffee ETN (NYSE: JO) and the iPath Pure Beta Coffee ETN (NYSE: CAFE), launched in 2008 and 2011 respectively. If you collect one, withdraw it after a gain of 10% or 20%.
Having said that, I think it’s time for me to go get my next cup of coffee. (Hopefully not in the rain.)