How to Invest in Coffee
Coffee is a staple of diets in both developed and emerging markets. While non-consumption uses for coffee are limited, the massive intake for this resource has led to the the creation of an active coffee futures market.
Because uses of coffee are so specialized, this commodity is likely more attractive to short-term investors looking to speculate on a change in price due to supply or demand factors. Coffee prices can see big swings over short periods of time, a result of both supply concentrations and the potential impact of extreme weather.
While the physical properties of coffee make investing in beans impractical, there are some other options for investors looking to gain exposure, including futures and options and exchange-traded products.
Ways to Invest in Coffee
There are 3 ways to invest in Coffee: ETFs, Futures, and Stocks. Click on the tabs below to learn more about each alternative.
What are Coffee ETFs?
Exchange-traded products offer investors an opportunity to establish exposure to coffee prices without having to worry about rolling futures exposure as expiration approaches. Moreover, coffee ETPs deliver exposure at a relatively low price point and offer impressive liquidity and transparency. For U.S. investors, the best option for coffee exposure is the iPath Dow Jones-UBS Coffee Total Return ETN (JO), which is linked to the performance of an index comprised of coffee futures. As such, investors should be aware that JO does not offer exposure to spot coffee prices, and that the slope of the futures curve will impact returns. Moreover, it should be noted that JO is an ETN, which means that investors are exposed to the credit risk of the issuing institution.
European investors may have more ETF options for coffee exposure; ETF Securities offers both leveraged and short coffee products in addition to a plain vanilla 1x ETF.
What are Coffee Futures?
There is a well-developed and very liquid market for coffee futures; though designed to help producers hedge against price fluctuations, these contracts can be used by investors looking to add coffee to their portfolio or speculate on a short-term price fluctuation.
The Coffee C contract is the world benchmark for Arabica coffee. Futures contracts traded on the ICE price physical delivery of exchange-grade green beans, from one of 19 countries of origin in a licensed warehouse to one of several ports in the U. S. and Europe, with stated premiums/discounts for ports and growths. ICE contracts are for 37,500 pounds of beans, and contracts are listed for March, May, July, September, and December.
Coffee futures are also traded on the New York Mercantile Exchange, with prices quoted in U.S. Dollars per pound. A single contract represents 37,500 pounds of cotton with a minimum fluctuation of $0.0005 per pound. Trading is conducted in the March, May, July, September, and December cycle for the next 23 months. All contracts are subject to the rules and regulations of NYMEX.
How to Buy Coffee Stocks
For some commodities, it is possible to gain indirect exposure to the resource through an investment in companies that are engaged in its production. That is challenging, however, given the nature of the coffee industry. Most of global production comes from small, privately-owned entities or farmers—meaning that purchasing stock is impossible. There are, however, a few options. Tata Coffee Ltd. (TCO:IN) is one option, as this Indian company accounts for a significant portion of Asian coffee bean production.
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