Demand for Coffee is Growing, and it Won’t Stay Cheap Forever

Note from this Blog: We have continually on this blog recommended to our foreign friends that want to invest in Ecuador to look at farming as a future source of income. And for us....coffee and Cacao are the best way to get into the business........

By Andy Hecht, Senior Commodities Editor

In a nation of tea drinkers, the joint venture between Indian mega-conglomerate Tata, which already owns the Eight O’Clock Coffee brand in the U.S., and the Seattle-based retail giant Starbucks will open 50 coffee outlets across India by the end of the year.

Another Indian company, Cafe Coffee Day, is taking the battle to the enemy camp – before the enemy arrives. It plans to scale up its premium coffee chain Square to counter the entry of Starbucks in India.

It’s all a sign of the huge boom about to take place in this commodity, and it’s not just happening in India. While the traditional markets in the U.S. and Europe remain central to the industry, the aroma of freshly brewed coffee is spreading fast and far.

The BRICs are Getting the Coffee Bug

The London-based International Coffee Organization estimates that global demand for coffee is growing by an average of 2% annually. But in emerging-market countries, such as China, India, Russia and across Latin America, including the coffee-producing nations themselves, demand is skyrocketing up to 20% a year.

And here is where the real investment opportunity lies. Given what we know about the rising global demand, the price of coffee is now a real bargain – it fell 19.5% to $1.82 per pound during the first quarter of 2012.

And while demand for coffee continues to grow, thanks to a bumper crop in Brazil last year, supply so far in 2012 has outstripped demand. Hence the bargain-basement price.

But that opportunity is not going to last long. Although the Brazil harvest was bountiful, there are long-term problems in other coffee-growing nations.

The Columbian harvest was “suboptimal,” as we say in the commodities world. Indeed, Columbia has suffered coffee production declines in recent years because of weather issues and crop fungus.

In the meantime, Vietnam has overtaken Columbia to become the world’s second-largest coffee producer, but it has struggled to get the necessary financing for farmers to grow the crop and send it to market. Vietnam is also always at the mercy of excessive rains and flood conditions.

Indonesia, another larger producer of coffee in Asia, experiences similar issues.

At the same time, increasing demand has also meant that stocks are sitting at multi-year lows. European stocks of Arabica and Robusta coffee are at their lowest levels since 2006. And stocks of Arabica coffee at New York’s ICE exchange at last glance stood at their lowest level in 11 years.
How to Play Coffee in the Markets

With current levels of low volatility, coffee call options are cheaper than usual and offer a great way to get in on the future action in this commodity.

While the market is witnessing a short-term surplus, demand and low stock levels can flip that surplus into a deficit in the blink of an eye.

And the futures market is telling us to expect higher coffee prices down the road. Futures contracts are currently priced progressively higher - coffee in 2014 is trading over $2 a pound while the active month futures contract is at $1.75.

As a seasoned trader, I believe the coffee market is ready to rebound.

Happy trade hunting from your eyes and ears in the commodity markets….

Andy Hecht