Coffee beans are in fact the seeds of the coffee tree, but are referred to as beans because of their striking resemblance. The coffee plant itself is actually a fruit and its end product is one of the most widely consumed beverages in the world. In fact, the crop is so popular, that over 2.25 billion cups are consumed daily around the globe; that's enough to give one cup to one third of the world's population. The farming of coffee beans began nearly 3,000 years ago, and was first introduced to the Americas in the early 1700's. The beans are typically handpicked once the fruit is ripe and the processing and cultivation of this crop occurs all around the world. As an investment, coffee has become a popular go to source for investors to make a play on economic trends. With such a large global reach, news from any part of the world can sway coffee prices in any direction, giving investors plenty of ways to play the crop.
Physical Properties and Uses Of Coffee
The coffee tree can range anywhere from 15 to 30 feet in height and are grown in rows several feet apart from each other. These trees need a very specific climate to survive: a warm climate, rains totaling around 70 inches per year and it is best for the fruit if the heavy rains occur in the beginning of the season rather than the end. The beans can be processed in two different ways: wet and dry processing. Wet processing is for higher quality beans that usually come from Central America and Africa. Dry processing occurs with lower quality fruits in areas like Brazil. Dry processing is much cheaper and simpler, but does not put out the same quality.
Coffee Supply And Demand
The top coffee producers in the world lie in emerging markets, with Brazil leading the way by a handsome margin. But while emerging markets may dominate the production of the commodity, developed markets are the biggest consumers. Finland ranks number one, consuming 12kg per capita on an annual basis. The Scandinavian country is followed by Norway, Iceland and Denmark for global consumption. Surprisingly, the United States doesn't make an appearance in the top 25 per capita consumers, as the nation takes the 26th slot.
|Top Green Coffee Producers – 2008|
|(millions of metric tons)|
|Rank||Area||Production (Int $1000)||Production (MT)|
|16||Papua New Guinea||61,644||75,400|
|Source: UN Food & Agriculture Organization|
Coffee Price Drivers
As a global commodity, the price of coffee is impacted by a number of factors and is often subject to significant price swings in a relatively short period of time. The major price drivers of coffee include:
- Weather Conditions: Like most agricultural commodities, coffee is subject to adverse weather conditions. Any unforeseen of extreme weather pattern can set off supply issues sending coffee futures soaring.
- Geopolitical Tensions: With the major coffee-producing nations being emerging markets, the supply of java can be easily bottlenecked by the combustible political situations that often characterize these nations. Moreover, trade relations between countries can have a big impact on the cost of coffee. When the U.S. lifted a trade embargo against Vietnam in 1994, demand for beans from South American nations dropped, as did prices.
- Discretionary Income: Though coffee is a regularly consumed beverage by a large majority of the world, changes in discretionary income could translate into drops or increases in coffee prices.
- Transportation Costs: Because there is a considerable distance between the major coffee producers and consumers, prices can be influenced by costs of transporting coffee. When oil prices rise, the costs of getting coffee to consumers increases, generally sending prices upward.
Investing in Coffee
Coffee's appeal as an investment stems from its wide use throughout the globe. As such a popular commodity, investors can use coffee to make plays against strong or weak economies. Coffee investments can also be used to play on weather or crop conditions in certain areas of the world.
Coffee futures are traded on the Chicago Mercantile Exchange, with prices quoted in U.S. Dollars per pound. A single contract represents 37,500 pounds of cotton with a minimum fluctuation of $0.0005 per pound. Trading is conducted in the March, May, July, September and December cycle for the next 23 months. All contracts are subject to the rules and regulations of NYMEX.
Trading terminates on the day immediately preceding the first notice day of the corresponding trading month of Coffee “C” futures at ICE Futures U.S.
There are several ETFs that offer exposure to this commodity. Some of the being pure plays, like the iPath Dow Jones-UBS Coffee ETN (NYSEARCA:JO), while others only hold a small percentage of the crop, giving investors a more diversified set of commodities.
- iPath Dow Jones-UBS Coffee ETN (JO) – 100%
- iPath Dow Jones-UBS Softs Total Return Sub-IndexSM ETN (NYSEARCA:JJS) – 38.8%
- DJ-UBS Commodity Index Total Return ETN (NYSEARCA:DJCI) – 2.6%
- ELEMENTS Rogers Intl Commodity ETN (NYSEARCA:RJI) – 2%