Four Little Known Factors Driving the Price of Coffee

While most people think of coffee as their go-to beverage for the morning or a lazy afternoon, its prevalence as a financial instrument has soared in recent years. As a member of the softs family, coffee futures offer heavy volatility and strong liquidity (no pun intended) for those looking to make a trade. As a crop, coffee production is dominated by Brazil, followed by Vietnam, Colombia, and a slew of other emerging markets, though it is the developed markets who hog the consumption. As coffee’s popularity continues to grow, traders looking to make a play will need to keep an eye on a number of factors that drive the price of this hard asset [see also Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk].

It should be noted that outside of its consumption as a popular beverage, coffee has a relatively low list of uses in comparison to other commodities. Because of this, its appeal to long-term investors is relatively limited. Instead, the soft commodity is better left for active traders looking to make a short-term play on developing trends. Successful investing in this asset will require consistent management and a disciplined plan of attack, so coffee futures are not for the faint of heart. Below, we outline four of the lesser-known price drivers for coffee that can have a significant weight on your underlying returns [see also The Ultimate Guide To Coffee Investing].

  1. Geopolitical Tensions: With the major coffee-producing nations being emerging markets, the supply of java can be easily bottlenecked by the combustible political situations that often characterize these nations. Moreover, trade relations between countries can have a big impact on the cost of coffee. When the U.S. lifted a trade embargo against Vietnam in 1994, demand for beans from South American nations dropped, as did prices. It is also important to remember that Brazil more then doubles the output of its nearest competitor, so trends in this emerging economy will have the biggest impact on prices [see also The Ten Commandments of Commodity Investing].
  2. Discretionary Income: Though coffee is a regularly consumed beverage by a large majority of the world, changes in discretionary income could translate into drops or increases in coffee prices. Primarily, traders should focus on the discretionary spending habits of the developed economies of the world. However it may be a misconception that the U.S. is one of the most important players in the coffee space, as we are only the 26th largest consumer. The top consumers traders will want to focus on primarily lie in Europe, with Norway, Iceland, and Denmark taking home the top three spots (on a per capita basis). Keeping a close eye on these foreign nations can save you bundles at home.
  3. Transportation Costs: There is a considerable distance between the world’s largest producers and consumers of this agricultural commodity, so effective transportation is key. It can be easy to forget about the impact that physically transporting coffee beans can have on prices, but it should always be in the back of your mind. When crude oil prices are high, transporting coffee will be rather pricy, which could build a premium into futures contracts, and this process can also work in reverse [see also 50 Ways To Invest In Agriculture].
  4. Health Concerns: This has been a controversial issue for quite some time now, as there are arguments going both ways on the health impacts of coffee. For every article you can find that boasts coffee is good for you, there can be another found that only talks about how horrible it is for one’s overall health. It is safe to say that coffee has its teeth firmly sunk into a number of people all around the world as many need it simply to get their day going. But that does not mean that things will stay the same forever, keeping an eye on studies relating to coffee’s health impacts will be especially significant given that the vast majority of this commodity is consumed as a discretionary item [see also Inflation ETF Special: 25 ETF Ideas To Fight Rising Prices].

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Disclosure: No positions at time of writing.

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