Continuing imbalances in supply and demand have pushed coffee prices to 30-year highs and are expected to continue to provide positive price support to the soft commodity.
Over the past year, coffee prices have nearly doubled as production has suffered due to weather conditions in Colombia and parts of Africa. In Colombia, storms last year damaged harvests, curtailing production by as much as 10 percent in the current quarter. To put it into perspective, output in April from Colombian coffee producers declined by 19 percent from a year earlier.
A similar production trend is being seen in Africa, one of the world’s major exporters of coffee, where severe droughts seen last year have curtailed production. Furthermore, stockpiles held by exporting nations such as Colombia are starting to deplete and reach a 40-year low.
Not only is there a supply issue in the caffeinated commodity, but global demand remains insatiable and continues to grow. As purchasing power continues to increase in the developing world, coffee consumption in certain regions of Latin America and Asia are following. Furthermore, as economies in the developed world, such as the United States, continue to show signs of stability, consumers are likely to splurge a little more on discretionary spending items, such as coffee.
From an investor’s standpoint, some ways to play coffee include:
- iPath Dow Jones-AIG Coffee ETN (NYSEARCA:JO).
- PowerShares DB Agriculture (NYSEARCA:DBA), which allocates nearly 14.9 % of its asset base to coffee futures.
- iPath DJ-UBS Agriculture TR Sub-Idx ETN (NYSEARCA:JJA), which allocated nearly 9.44 % of its assets to coffee futures.
- iPath Pure Beta Coffee ETN (NYSEARCA:CAFE).
Disclosure: No positions