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By Julian Murdoch

It's hard to find a commodity rallying harder in the short term these days than coffee. Spot coffee, as measured by the S&P Spot Coffee Index, is up nearly 20 percent year-to-date, and up almost 25 percent since its lows in April. In contrast, you could pick any major commodity index and find it's down for the year: The Goldman Sachs Commodity Index is down 12 percent; the DJ-UBS Commodity Index is down 9.8 percent and even the GreenHaven Continuous Commodity Index is down 4.8 percent.

Going back over the past two years, you'll find coffee's been one of the only solid performers in commodities:

Coffee performance

The pale blue line labeled "KC1" shows front-month coffee futures up 13 percent since July 2008, while the red line, which represents the GSCI Index, is down a crippling 62 percent and change.

Of course, investing in coffee hasn't been without its costs. Like many commodities, coffee often trades in contango, i.e., tomorrow's contract is more expensive to own than today's. As a result, the long coffee investor has had to pay the contango-piper each month they've rolled their position forward. You can see that ding in the dark blue line on our chart: the iPath Dow Jones-UBS Coffee ETN (NYSEArca: JO). As you can see, while JO is still up a healthy 15 percent and has certainly performed better than the broader commodities markets, JO has still lost money over spot coffee prices.

Scarcity Vs. Starbucks

What's behind the pop in coffee prices is relatively easy to explain, and it all comes back to supply and demand.

According to the USDA, the demand picture for coffee remains strong:

Global Coffee Demand

Coffee Demand

With the exception of a minor hiccup during the 2008 financial crisis, when we all switched from coffee to hard liquor to calm our nerves, global coffee drinkers have become insatiable. The actual amount of coffee consumed in less than 10 years has more than doubled.

Farmers, on the other hand, can only do so much to keep up:

Global Coffee Production

Coffee Production

So as you might expect, the end result is that there's far less of the magic bean available to turn into actual drinkable coffee. Indeed, where the world used to have years' worth of coffee supplies sitting in stockpile, now those inventories have dwindled to mere months.

Global Coffee Stocks: Days-to-Use

Coffee Days-to-Use

This increasingly tight inventory situation has led to increased price sensitivity to production shocks. If a year's worth of coffee were on hand in the warehouses, the market could easily absorb a minor disruption from any major coffee producer. But with stocks so low, the slightest provocation can send futures traders into a buying frenzy.

So how extreme will the situation get?

Well, demand is clearly higher than supply at the moment, and even a momentary surprise in the record size of Brazil's crop this year won't be enough to dampen the long-term dynamics. At the same time, the "scarcity" threat has long since been priced into the market. So all told, we've seen a substantial shift in how the commodities markets are thinking about coffee.

Consider the persistent (and near-eternal) contango in the coffee market:

Coffee Futures Curves

Futures Curves

From left to right, this shows the futures curves in 2007, 2009, six months ago and today (as shown by the top black line). While you can clearly see the massive demand increase over the past few years reflected in the ever-rising mean of each curve, the overall structure remained intact: contango, contango, contango. That is, until now. For the first time in recent memory, the front-month roll is the only roll that will cost you, and investing further out on the curve actually implies that you think today's prices are abnormally high; that is, you're better off buying next year's coffee today, rather than storing it up for a rainy day.

More than any supply and demand figures, this structural shift in the curve makes me think that this time, something is different in the coffee markets. That's good news for some investors; i.e., those working and rolling positions further out on the curve. For the moment, however, JO investors are still stuck paying that front-month contango tax.

But next month? Maybe this time it really is different.

Source: Scarcity vs. Starbucks: Going Cuckoo for Coffee