Coffee Market 101: How to Invest in Coffee ETFs, Stocks & Futures

Investing in Coffee

You will not be surprised to learn that coffee is the second highest traded commodity in the world, after crude oil. Coffee is one of the world’s favourite commodities. Its rich aroma is often the first thing we smell and taste when we wake up in the morning.

Investors can invest directly in the commodity, coffee beans, or one of the many stocks that are in the production and consumption side of these popular brown beans.

Coffee is a good investment in good times and bad. When was the last time you cut out coffee from your budget to save on expenses? We are more likely to forego a $6 latte at Starbucks and make our own homebrew than deny ourselves a cup of coffee altogether.

Coffee ETFs

Coffee exchange-traded funds (ETF) provide the option of trading in coffee beans – the commodity. ETFs are the lowest risk option for investing in coffee. The leading coffee ETFs are actually ETNs. Both ETFs and ETNs trade like stocks on an exchange. An ETF represents an underlying equity security whereas an ETN is a senior debt note, similar to a bond.

Two popular coffee ETNs providing 100% exposure to the coffee market are the iPath Bloomberg Coffee Subindex Total Return ETN (JO) and the iPath Pure Beta Coffee ETN (CAFE). Both ETFs track coffee futures contracts.JO tracks the Dow Jones-UBS Coffee Index and CAFE tracks the Barclays Capital Coffee Pure Beta Total Return Index.

Coffee Futures

Before coffee reaches your coffee cup at Starbucks, billions of dollars in trading takes place on the underlying commodity – the coffee bean.

Businesses involved in the coffee production and sales chain have long used the futures market to hedge their exposure to changes in coffee bean prices. Coffee bean growers and refiners protect their profit margins by buying futures contracts on coffee beans.

Coffee trades on exchanges around the world. The two most popular coffee futures markets are the US Intercontinental Exchange in New York and the International Euronext.liffe market in London. Both markets price coffee in US dollars. On Euronext, the minimum price movement is $1 per ton. One contract equals 10 metric tons, so $10 a contract.

To trade in the futures market, you will be required to pay a margin fee as a speculator. Hedgers, who are involved in the production of an asset such as coffee bean growers, pay a slightly lower margin than pure traders. The initial margin requirement on Liffe for the Robusta Coffee contract is $1,144.

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Coffee Stocks

Successful stock investors advise us to invest in what we like, so why not your favourite coffee shop? First, make sure your morning coffee stop has comparable or better fundamentals than its competition. Popular coffee stocks include Starbucks (SBUX) and Peet’s Coffee & Tea (PEET). These coffee shops have to compete with Nestle (NSRGY) coffee pods at home.

Since coffee is a favourite drink of the growing middle class, coffee businesses that are expanding in emerging markets have good long-term growth prospects. Homegrown competition is about to get stiffer, though. Tata Global Beverages (TATAGLOBAL) has launched instant coffee Tata Coffee Grand. Newcomers such as China’s iTaste hope to take their pod coffee innovations public in the future.

Risks in the Coffee Market

Coffee has similar risks to both the agricultural and crude oil markets. Like other agricultural crops, weather risk can produce significant losses. Frost before the harvest season in Brazil could significantly reduce the hull from a harvest. Natural disasters and major weather events such as droughts also pose a risk.

As a global commodity, coffee bean prices can be affected by changes in the relative value of the currencies of producing countries. The top coffee growers are Brazil, Vietnam and Columbia.  Coffee lovers are proving coffee to be a hardy stock even during a recession. Even if they buy fewer lattes, sales of coffee beans remain strong.

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