I was crazy about my car.
Thunder rumbled in the sky, rain and wind whipped me around, and I desperately wanted to be in my tiny red Toyota, so I didn’t have to munch constantly in my rain-soaked rains.
But suddenly, a bright green mermaid logo peeked out of the fog on the other side of the parking lot. And I found myself driving past the car toward the Starbucks lighthouse.
When a mermaid coffee song calls out a caffeine addict like me, well … not even the monsoon will stop me.
And as an investor, it might make you think about the story of coffee demand if you haven’t already.
That is a smart move at the moment.
Yes, coffee has a troubled history: it is one of the most volatile commodities to be traded on the American and global futures market. Each year, the mood and price are shaped by weather conditions in key developing regions. When the forecast is correct and there are no fungal plagues that infest crops, prices are lower.
But then a critical area of coffee growth hits, say, a devastating drought, like Brazil, the world’s largest producer, which accounts for more than a third of the total coffee supply – 1986. And rockets with the price of coffee. (By the way, there are additional drivers of volatility, such as constant currency fluctuations.)
In the end, this kind of unpredictable, jerky movement scares investors.
But the fact is that global demand for coffee is expected to double by 2050.
In the meantime, we are on a three-year supply shortage, as critically growing regions like Brazil continue to have severe and irregular droughts.
On top of that, the genetic diversity of Arabica coffee beans – the highest quality and main bean that is consumed – is extremely low. This means that the plant cannot adapt quickly enough to changes in the environment, which emphasizes the fragile holding of the crop for survival.
Not surprisingly, stocks are struggling. The International Coffee Organization expects coffee production to reach a record 153.9 million bags globally for the 2016-2017 season, which is coming to an end. But demand is projected at 155.1 million bags. That’s a difference of 1.2 million bags.
Yes, most of this knowledge is destined for coffee. But it is clear that the crop is facing an “existential crisis,” as Ric Rhinehart, executive director of the Special Coffee Association, said.
And it’s a long-term story of demand and demand.
I know you’re probably thinking, “That’s all right, Jess. But what does that mean for investors in the short term?”
The price of coffee is heating up. The consensus estimate is that Arabica coffee prices will rise by an additional 5% over the next year. But that is conservative.
As one expert says, “Short-term instability should give us a double-digit move. This is not a dunk, a huge gain, but extreme sentiment and traders’ forecasts agree for a solid gain.”
There are two ways to invest in this: iPath Bloomberg coffee ETN (NYSE: JO) i iPath pure beta coffee ETN (NYSE: CAFE), launched in 2008 and 2011, respectively. If you withdraw one of these, pay out the money after winning 10% or 20%.
With all that said, I think it’s time to go hunting for the next cup of coffee. (I hope there will be no rain.)