Where and how does it make sense?
Between 2005 and 2015, global coffee consumption increased by 25 percent. Anyone who is interested in this industry as an investor invests in products that are traded on the stock exchange. These are ETPs, abbreviated after the term Exchange Traded Products or ETCs: Exchange Traded Commodities. The other option is indirect investment through listed companies that process and sell coffee, such as Nestle or Starbucks.
The amount of harvest and the climate determine the price
The coffee trade is an object of speculation; external influences ensure that prices fluctuate sharply. To make this clearer: When in 1994 frost destroyed a large part of the harvest in the world’s largest cultivation country Brazil, prices rose from 70 cents to two US dollars per pound. In 2001, however, global overproduction meant that a pound of coffee only cost 41 cents. Predictions about the quantity and quality of the next harvests therefore depend very much on the long-term weather forecasts. And they relate to countries with extreme climatic conditions: the five largest coffee growers in the world are Brazil, Vietnam, Indonesia, Colombia and India. In general, coffee can only be grown on our planet in the equatorial belt, so the harvested area cannot be increased at will. In contrast to Robusta coffee, the particularly good Arabica bean also grows only at high altitudes.
The fact that the world population is growing and that coffee is one of the world’s most popular drinks speaks in favor of rising prices. Above all, China, the most populous country in the world, is the largest growth market.
Investments with a view to price developments
In general and especially for small investors, investing in the physical good – i.e. in the coffee bean – does not make sense. Storage costs and limited shelf life with loss of quality for this natural product speak against it. Classic open-end certificates that participate in the development of the coffee price are suitable for beginners. With Exchange Traded Commodities (ETCs), an asset class for raw materials, the investor either acquires a call certificate and thus counts on rising prices. Or he buys put certificates that bet on falling prices. It is also important to pay attention to currency-adjusted certificates, as coffee is not traded in euros. If you also buy from large and liquid credit institutions, you reduce the risk of deposits being lost completely.
Investment advisers predict that the price of coffee is likely to rise in the medium to long term, but point to the risk of volatility. They recommend security-conscious investors to only include a moderate proportion of coffee certificates in their overall portfolio.
Buying stocks and futures contracts
An indirect entry as an investor is buying shares in companies that work in the processing and distribution of coffee products. Global players include the Swiss Nestlé Group and the US Starbucks chain. Those who are specifically looking for access to the Asian market can acquire shares in Tata Coffee in India.
Futures, also known as future contracts, are another way of getting into the coffee business as an investor. In this way, a continuous commitment to raw materials is possible – for coffee, for example. This process, known as “rolling”, results in a rolling return and avoids the actual delivery of the goods. It is sold shortly before the contract expires – and the money is invested in a new one. If the contracts purchased are more expensive than those sold, economics speaks of a rising forward curve: This is negative for investors and is known as contango. If the contracts sold are more expensive than when they were bought, this is based on a falling forward curve and leads to profits for investors: the technical term for this is backwardation.
The ETPs, the Exchange Traded Products, belong to the same business model. They reproduce indices – singular index – that simulate continuous exposure to the income from coffee futures. Stock market indices describe the development of certain stocks over a selected period and their changes in the process. Three examples of coffee futures are the Dow Jones-UBS Coffee Subindex, the US Barclays Capital Commodity Index Coffee and the UBS Bloomberg CMCI Coffee.
Plan in generations – not in quarters
Sustainability is a concept with a future – also when it comes to coffee investments. Anyone who includes ecological and social components in their investment is preparing for future challenges. Just like the billionaire Reimann family with the German-Dutch coffee company Jacobs Douwe Egberts. They are forming up as an alternative to Starbucks and Nestlé. The principle is not to plan in quarterly figures, but in generations. If the first case is about profits and bonuses, the second is the well-being of everyone involved in the production and marketing process. Environmentally friendly, low-pollutant cultivation without destroying the agricultural areas, humane, social standards of the employees and fair ones Paying everyone: these are the goals. Because the fair trade certificate is often too expensive for small coffee farmers in particular, one of the plans is: entire growing regions are certified, monitoring is carried out via satellite and through on-site inspections. This ensures that the standards are adhered to. Anyone who invests in coffee here is most likely right.
Investing in sustainable coffee startups
The industry has recognized this trend and offers potential investors several startups that stand for this concept of sustainability. For example the Coffee Circle: It sells top- quality Ethiopian coffee and customers decide when they buy which of the various development projects they want to support on site. Moema goes beyond the classic fair trade model and installs Direct Fair Trade : the entire added value from coffee production and marketing remains in the country of cultivation. My Coffee Star offers the reusable coffee capsule. Erikas Bag Shop has bags made of fabric-reinforced filter bags. They have Finnish women’s names because the idea originally came from Finland.
Investment opportunities in brief
An investment in the coffee industry is made through open-end certificates such as ETCs or through the purchase of shares in listed companies that process and sell coffee. Coffee consumption is likely to increase in the future, but is subject to price fluctuations that are difficult to calculate and depend on, for example, the weather.