Give your portfolio a jolt with coffee investments

Here's Why Is Coffee Such an Important Commodity
Here's Why Is Coffee Such an Important Commodity

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.

There are 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.

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But investing 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.

Coffee prices 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.

Shawn Hackett, 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 even higher.

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"Brazil 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.

With the market flooded, prices fell, with coffee futures prices trading around $1.17 a pound.
There are 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.

Arabica crops 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 cutting production.

Arabica and 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.

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Because Brazil 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.

"The 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.

Mike Ciccarelli, commodity and stock trader at Chicago-based, says he "really finds it interesting to buy" coffee now, even though the market is being hit by the general negative sentiment in commodities.

Aside from 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.

Hackett says it's important for investors to understand that moves in the coffee market can be sharp and short-lived.

"The 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," he says.

Not everyone 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.

"If 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.

What coffee 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 Ciccarelli say.

Ciccarelli 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.

Hackett says 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.

The biggest 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," he says.

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