- Global demand expected to stay high
- Increasing consumption in China the key to faster growth
- Adverse weather conditions may lower supply levels
Coffee has become a hugely popular drink across the planet in the last few years. The success of chains like Starbucks and Costa Coffee has led to demand for coffee going through the roof.
It is estimated that more than 2.25 billion cups of this drink are consumed every day. Therefore, it is worth considering whether to stimulate your portfolio by pouring some of your money into coffee this month.
Trading Coffee as a Commodity
There are different types of beans traded in different exchanges around the world. Arabica and Robusta are both traded in New York, London and Singapore.
As with most commodities, investors see buying coffee as a way of diversifying their portfolio. You might not be aware that it is the second-most traded commodity, after oil. Prices rise and fall according to supply and demand, meaning that it is important that you look at the market.
At the time of writing, one pound of bean costs a little over $1.06. At the end of 2019, the price of coffee was over $1.30.
Going further back, it reached $0.90 in April 2019. Before that, the recent high point was $3 in 2011. It lowest price in this century was $.043 in 2001.
We can see a fair degree of volatility in this market. The following are some of the factors to take into account.
- The weather. Coffee needs very specific weather conditions to grow, and it is mainly produced in countries where extreme weather, such as El Niño, can ruin the crops.
- The level of demand. A good example here is China, where the average consumption is below one cup per person per year. However, demand is growing rapidly, with an annual growth rate of 11.3% predicted.
- The price of alternatives. If the likes of tea, cocoa and other alternative drinks fluctuate then this can impact the demand for coffee.
- Current stock levels. Stock-piling of supplies by producers and suppliers will lower the price.
- New techniques and coffee-producing regions.
The Future of Coffee Prices
There appear to be two major issues around the future of coffee. The first one is the emergence of new markets. China, in particular, could be a game-changer. If this market keeps on growing then global demand will increase greatly.
The other point to bear in mind is climate change. This is something that is threatening coffee production in several regions. In particular, Ethiopia accounts for 4.2% of global production and is affected by the threat of climate change. On the other hand, it was reported in 2019 that the government there is looking to triple its coffee harvest in the next five years.
The leading producer is Brazil, which is also the second-biggest consumer after the US. At the start of 2020, coffee crops in Minas Gerais were threatened by torrential rain. While the damage appears to be limited, this shows the potential for supplies being seriously affected.
You might also be tempted to buy shares in the likes of Starbucks, Costa Coffee (part of Coca-Cola) or Nestle. These are major players in the market whose share prices are linked to additional factors such as their performance, customer loyalty and competition.
Coffee is likely to remain a volatile commodity, as there are so many different factors that affect it. At its current modest price, it is an interesting option for investors, as it isn’t closely linked to other major commodities or economic issues.