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We took a lot of heat in recent articles where we discussed the price of coffee and stated that Starbucks (NASDAQ:SBUX) was our favorite way to play the bear market in the commodity. Readers stated that coffee is a small expense and hardly matters, even pointing to the company's own comments to try and highlight how this does not have any impact. We have not had time to fact check this, but CNBC's Kate Kelly reported today on coffee (because it is the worst performing commodity in 2013) and stated that she saw in the company's 10-k and was told by executives that margins increased 22% due to coffee prices being down.

What is good for Starbucks is also good for names such as Dunkin Brands (NASDAQ:DNKN) and to a lesser extent McDonald's (NYSE:MCD), although one can argue that the quality of the coffee goes down at the non-specialty shops and the impact is much less as there are so many other inputs as well.

Chart of the Day:

With coffee prices creeping back up into the close of the year it is beginning to look bullish to us. We are coming off of multi-year lows, so it is important to be careful here, especially considering all of the head-fakes we have had over the years. A move above the $120 level would interest U.S. in a trade, but not before then.


(Click to enlarge)

Source: CNBC

Commodity prices this morning are as follows:

  • Gold: $1,201.20/ounce, down by $2.50/ounce
  • Silver: $19.495/ounce, up by $0.042/ounce
  • Oil: $99.15/barrel, down by $0.17/barrel
  • RBOB Gas: $2.7743/gallon, down by $0.0088/gallon
  • Natural Gas: $4.511/MMbtu, up by $0.093/MMbtu
  • Copper: $3.3045/pound, down by $0.0035/pound
  • Platinum: $1,337.80/ounce, up by $5.60/ounce

Commentary

If coffee prices begin a move higher, whether it be a marginal move, gradual move or even multi-year bull market, we doubt that the big coffee users would feel much pain initially. Later down the road, yes, but not upfront. Also we have seen many of these names which have used coffee as a growth platform over the years also branch out into new areas and thus diversify their revenue and income streams.

Because of all of this we do not think that one wants to play coffee via equities, especially with prices not having an impact upon companies' businesses for some time down the road.

The iPath DJ-UBS Coffee Sub TR ETN is probably the best way to play coffee prices, although there are some liquidity concerns.


(Click to enlarge)

Source: Yahoo Finance

The best way to play coffee in our opinion is the iPath DJ-UBS Coffee TR Sub-Index ETN (NYSEARCA:JO) which has thin volume (it only trades about 120,000 units per day) and has just over $100 million in assets. It is a pure play way to get coffee exposure and could very well grow in popularity should coffee see a rebound in 2014.

Another possibility for readers is the PowerShares DB Agriculture ETF (NYSEARCA:DBA) which has over $1 billion in assets, but only 9.52% of its assets are invested in coffee. This gets one diversification among the agriculture spectrum, but also opens up the possibility of one being correct in their trade (on coffee) but wrong on the way the trade was structured (by not picking the pure coffee investment). Of course the diversification could also shield one from another bad year in coffee, so it is all about one's ability to take on risk as well as one's outlook on agricultural commodities as a whole.

Source: Commodities Today: What You Need To Know About Coffee