Is Now The Time To Buy Coffee?
It’s not often I admit this, but I’m struggling with today’s article. I’m sitting here at my desk wondering what to write about. Do I write about the recent Obama / Chrysler game of chicken? Do I write about the rising price of oil? Do I write about the interesting stock I researched over the weekend?
Maybe I’ll tell you about my day-trip to Black Canyon City.
Or maybe I’ll give you my chicken and dumpling recipe… it was quite good. The bread pudding for dessert made the meal if you ask me. I really need my morning coffee. I’ve got to get my brain working.
Coffee. I need to get some coffee.
I love coffee. I consume several cups of the stuff every day… for years. I became addicted while dating a beautiful girl in college (I’ll hide her identity to protect the innocent). Every date seemed to start or end with us slowly nursing our hot coffee as we talked politics, or about Ayn Rand. (Is there really a difference?)
But I digress. You don’t want to hear about my love of coffee.
You probably want to learn how to make money by trading coffee. Lucky for you, that’s a topic I’ve been doing a bit of research on lately.
As you know, every market is driven by our old friends, supply and demand.
Coffee is no different. Even this industry follows the most basic lessons learned in Econ 101. However, coffee has a very interesting supply and demand dynamic.
First, let’s start with demand.
I’m not singlehandedly supporting the coffee industry… though sometimes it seems like I am. Growing demand for coffee is absolutely staggering. Just look at Starbucks. The company was opening hundreds of stores every year over the last decade. Their growth was absolutely phenomenal.
It’s slowed a bit recently, but give it time. While their growth in North America is slowing, China is just ramping up.
China is starting to emerge as a superpower in the world of coffee drinking. Long held as the pinnacle of tea drinking, coffee is making inroads. Western customs are starting to influence the largest population on the planet. Starbucks is carrying, with missionary zeal I might add, the American way of drinking coffee to the masses in China.
Starbucks has more than 700 stores in China. And that number is growing rapidly.
What does this point to?
Growing coffee consumption of course. Long term, as Chinese tastes shift from tea to a stronger brew, demand for the coffee bean is bound to climb. Here’s the key. We don’t need to see a huge shift. Just a tiny increase in coffee consumption across China will drive demand through the roof.
So where’s the supply going to come from?
Latin America of course.
Major producers include Columbia, Costa Rica, and Brazil. Latin American countries account for almost 60% of the worldwide production. But production isn’t just turned on and off like a faucet. The Arabica coffee plant takes seven years to reach maturity. That means if demand spikes, the world will be scrambling to play catch up for a number of years… and that means higher prices.
So we want to own coffee right now, right?
Not so fast. Coffee also has a seasonal cycle. Remember, Latin America produces much of the world’s coffee and their harvest occurs primarily in June and July. That means a huge amount of coffee hits the market during the summer months, just as coffee drinking in the northern hemisphere hit’s a low point.
Who wants to drink hot coffee in the summer, right?
Do a bit of research and you’ll find something interesting. More than 80% of the time, coffee prices fall during June and July.
So what does all this mean?
Demand from China is growing and new supply takes seven years to develop. Long term, I’ve got no doubt coffee prices are heading higher. However, we must be cautious about picking entry points. June and July are historically low points for the coffee market. Consider using this trough to establish a position. Coffee looks like a big winner to me – I’d bet my coffee mug on it.
Category: Commodities
