If you decide to trade in coffee finding liquidity will probably not be your biggest issue. Trading volumes of coffee is the second largest in the world next to oil. The trading value is several hundreds of billions every year. Below we will go through some aspect and information that we think will be of great value if you decide to or wants to trade in coffee.
Coffee trades mainly in two types of beans, Arabica and Robusta. Arabica is considered to taste a bit better and therefore have a higher price than the Robusta bean. But the Robusta bean contains 50% more caffeine than the Robusta bean. Hence the Arabica bean is mostly used for the brewing of coffee and Robusta for extract caffeine which is commonly used in several products.
Coffee was first grown in Ethiopia for over 2000 years ago and from Africa it found its way to the middle east and travelling salesmen, which later spread it from the middle east.
Coffee grows on bushes as beans, when you first plant the bush it takes between 3 to 5 years for the bush to hold fruit, or beans in this case. Later the beans are harvested and often dried and roasted to among others become brewing-coffee.
The larges producers of coffee in the world is Brazil, Vietnam, Indonesia, Colombia and Ethiopia. The roasting of the beans does not happen in those countries but in the counties where the bean is consumed. The larges consumers of coffee and therefore the biggest importers of coffee is the European Union, the US but also Russia and Japan.
What tend to affect the supply and demand of coffee?
- Geopolitical effects
- Climate changes
- The global economy
- The USD and the price of oil
The producing countries of coffee is seen as counties with low political stability which will affect the supply of coffee, this can be of a long-term effect and a short-term effect but as the top 5 producing counties of coffee produces 2/3 of the total production political stability or the lack of political stability is something you hare to have in mind when you trade in coffee or invest in coffee since it can both create opportunities and traps.
The coffee plant is a sensitive plant and can easily be affected negatively on changes in the climate. The producing countries are located among the equator and need just the right amount of water and sunshine. Changes in climate that will affect the yield of the coffee-plant production will also affect prices and something you have to consider or have an opinion about when you trade in coffee.
Top 4 buying companies of coffee in the world is Proctor & Gamble, Kraft, Nestle and Sara Lee, these 4 companies make up to 50% of the total buying-volumes in the world. As almost all global companies these 4 players are too dependent of the global economy, so an expanding global economy will probably be supportive for the price of coffee and vice versa if the global economy gets weaker. An investment in coffee could be a way to play the global economy if you want to trade in commodities.
Speculators will have an impact on the price of coffee, as seen in the beginning of this section, coffee is one of the most traded commitiese in the world and the liquidity will attract speculators which will also have an impact on the price of coffee. In theory this will probably have the biggest impact on a shorter time horizon and mostly a factor you need to consider when you trade in coffee but can also create a good entry point if you want to invest in coffee.
Coffee like all commodities is priced in USD, a weak or a strong USD can change the price perception of coffee and there for change the demand. The price of oil will also have an aspect in the price perception of coffee since its seldom consumed where its produced and transportation is a factor consumer have to consider when they buy coffee
Reasons why you might want to invest in coffee
- Portfolio diversification
- Profit on climate changes
- Hedge on inflation
- Good liquidity
Commodities has a low measured correlation to other asset classes and an investment in coffee or another commodity will in theory increase your diversification of your investment portfolio. A low level of covariance is sought after for investors to decrease your measured risk in your portfolio so an investment in coffee could help you to decrease your overall risk in your investment portfolio.
As we wrote about earlier the coffee plant is a sensitive one, an investment in coffee could be a way to play the changing climate in the world.
Commodities does often increase in price when the inflation increase and the price of a commodity does often decrease when the inflation decreases, ie it has a high correlation with inflation. If you have other investments in your portfolio that might perform poorly when the inflation is high an investment in coffee could go up in value then and act as a hedge on inflation.