How to Play the Jump in Coffee Prices

Jun.14.11 | About: iPath Dow (JO)

Practically no one is talking about it, but one of the most commonly used commodities nearly doubled in price between the middle of May 2010 to the middle of May this year. Of course, Ben Bernanke will tell you that such price swings don’t necessarily hit the consumer – which would then trigger a boost in consumer price inflation. But my wife pointed out that prices for this commodity are starting to now rise for the consumer.

Still groggy from a lack of sleep and not enough coffee, I hadn’t noticed an obvious sign that prices for this commodity are now hitting home. But the price of coffee is going up at some of my local favorites. It might not seem like that big of a deal, but the important thing to remember is that the types of price hikes that eventually start to hurt the wallet are almost always slow and incremental. The wild moonshot price swing is the exception, not the rule.

Paying an extra 50 cents per refill is not that big of a deal – but it is an obvious harbinger of what’s to come. Corporations have staved off price increases for as long as possible. but it’s starting to hurt.

We can expect higher priced commodities to hit consumer prices in an accelerating fashion. Nothing has changed in terms of supply or demand, but prices for nearly everything have simply risen too high for businesses to continue to absorb.

The shocking news is that while silver, gold and oil continue to capture headlines as their prices rise, coffee has actually risen further than all three from May 2010-May 2011.

[Click to enlarge]

Click to enlarge

You might be thinking that the gold and oil markets dwarf coffee – which is true. But what you might not know is that the coffee market is actually bigger than the silver market. About $37 billion worth of silver was consumed over the last year. But coffee consumption totaled about $38 billion for the same period.

You’d think that with a bigger market, and bigger gains in price, coffee would be stealing headlines from silver. But so far, I’ve barely noticed any headlines at all about coffee – even though major brands like Dunkin’ Donuts and Folgers have raised their prices four times since May 2010.

And unlike gold, silver or oil, it’s not likely that a bunch of new coffee producers will soon flood the market with new coffee supply. Coffee only grows in very limited swaths around the equator, at high elevations, in a not-too-hot/not-too-cold region with just the right soil conditions and not too much rain. Not only that, but it takes years to get a new crop of coffee trees to produce. Whereas gold, silver and even oil producers have the ability to ramp up supply if need be, coffee growers don’t have that luxury.

I think we’ll continue to see higher priced coffee hit the shelves. And when the public begins to notice, we’ll see coffee investments hit the roof.

The most direct way to invest in higher priced coffee is to buy the Dow Jones UBS Coffee Exchange Traded Note (NYSEARCA:JO), which tracks the price of coffee futures. And it’s done a decent job of keeping pace with price changes of the underlying commodity.

That’s all you can ask for with an ETF or an ETN that tracks the futures market. It will never outpace gains made in the underlying price of coffee, so it doesn’t offer leverage, but it’s a good pure play.