Profit From The Worst Performing Commodity Of 2012?

| November 30, 2012 | 0 Comments

Just when you thought a mug of Starbucks (SBUX) coffee couldn’t get any pricier, they introduce this…

… a $7 cup of Joe. 

That’s right, the famous Seattle-based chain is introducing a new brew derived from the rare Geisha coffee bean.  According to Starbucks, the exceptional bean is very challenging to grow but tastes far superior- hence the eye-popping price tag.

In fact, if you want an eight-ounce bag of these benevolent beans from Starbucks, it’ll set you back $40!

But even though Starbucks can demand a premium for Giesha, investors aren’t willing to pay up for the more common variety- Arabica.  In fact, the price of Arabica broke to a new 52–week low of $1.48 per pound in mid-November.

Take a look…


What’s giving coffee investors the jitters?

Now that the 2012 Arabica bean harvest is in full swing, investors are learning that the world’s largest grower, Brazil, has a bumper crop.  As a matter of fact, the International Coffee Organization (ICO) estimates the South American country will produce 50.5 million bags this year- a record.

What’s more, Brazil’s northern neighbor, Columbia, is expecting a hefty crop of its own.  The ICO estimates Columbia will produce around 18 million bags in their ongoing harvest season.

But that’s not all…

Other coffee growing countries like Vietnam, Indonesia, and India are also producing boatloads of java.  All these hefty crops has the ICO estimating the 2012-2013 global coffee harvest will produce 148 million bags… 10% higher than last year.

These abundant supplies are precisely why coffee is down 31% year-to-date, making it the worst performing commodity of 2012.

And listen to this…

Even though coffee’s trading near yearly lows, prices will likely fall even further.  You see, even though coffee demand has risen dramatically over the past 10 years, it’s relatively stagnant compared to last year.

Mix static demand with a looming bean surplus and coffee prices may fall to $1.40 or lower.  Such a drop would put prices at levels not seen since early 2010.

So this begs the question…

Is there a way to capitalize on falling coffee prices?

The simple answer is… yes.  But you’ll have to be patient.

Margins at coffee chains like Starbucks, Dunkin’ Brands (DNKN), and Caribou Coffee Company (CBOU) will eventually strengthen thanks to the recent swoon in bean prices.  But since these companies contract their coffee purchases months ahead of time, commodity savings aren’t immediate.

In other words, today’s lower coffee prices won’t start benefitting the bottom line for at least another six months.  And remember, there are other variables at play with these companies.  Commodity input savings could be offset by other expenses.

However, all things considered equal, these companies should benefit tremendously from lower coffee prices.  If you have a six-month investment time horizon, SBUX, DNKN, and CBOU are worth a look!

Until Next Time,

Justin Bennett

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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