Is Now The Time To Buy Coffee?
The Dynamic Wealth Report
May 11, 2009
Did You Drink Coffee This Morning?
It’s not often I admit this, but I’m struggling with today’s article. I’m sitting here at my desk wondering what to write about. Do I write
about the recent Obama / Chrysler game of chicken? Do I write about the
rising price of oil? Do I write about the interesting stock I researched
over the weekend?
Maybe I'll tell you about my day-trip to Black Canyon City.
Or maybe I’ll give you my chicken and dumpling recipe… it was quite
good. The bread pudding for dessert made the meal if you ask me. I
really need my morning coffee. I’ve got to get my brain working.
Coffee. I need to get some coffee.
I love coffee. I consume several cups of the stuff every day… for
years. I became addicted while dating a beautiful girl in college
(I’ll hide her identity to protect the innocent). Every date seemed to
start or end with us slowly nursing our hot coffee as we talked
politics, or about Ayn Rand. (Is there really a difference?)
But I digress. You don’t want to hear about my love of coffee.
You probably want to learn how to make money by trading coffee. Lucky
for you, that’s a topic I’ve been doing a bit of research on lately.
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As you know, every market is driven by our old friends, supply and
demand.
Coffee is no different. Even this industry follows the most basic
lessons learned in Econ 101. However, coffee has a very interesting
supply and demand dynamic.
First, let’s start with demand.
I’m not singlehandedly supporting the coffee industry… though sometimes
it seems like I am. Growing demand for coffee is absolutely staggering. Just look at Starbucks. The company was opening hundreds of stores every
year over the last decade. Their growth was absolutely phenomenal.
It’s slowed a bit recently, but give it time. While their growth in
North America is slowing, China is just ramping up.
China is starting to emerge as a superpower in the world of coffee
drinking. Long held as the pinnacle of tea drinking, coffee is making
inroads. Western customs are starting to influence the largest
population on the planet. Starbucks is carrying, with missionary zeal I
might add, the American way of drinking coffee to the masses in China.
Starbucks has more than 700 stores in China. And that number is growing
rapidly.
What does this point to?
Growing coffee consumption of course. Long term, as Chinese tastes shift
from tea to a stronger brew, demand for the coffee bean is bound to
climb. Here's the key. We don’t need to see a huge shift. Just a tiny
increase in coffee consumption across China will drive demand through
the roof.
So where’s the supply going to come from?
Latin America of course.
Major producers include Columbia, Costa Rica, and Brazil. Latin American
countries account for almost 60% of the worldwide production. But
production isn’t just turned on and off like a faucet. The Arabica
coffee plant takes seven years to reach maturity. That means if demand
spikes, the world will be scrambling to play catch up for a number of
years… and that means higher prices.
So we want to own coffee right now, right?
Not so fast. Coffee also has a seasonal cycle. Remember, Latin America
produces much of the world’s coffee and their harvest occurs primarily
in June and July. That means a huge amount of coffee hits the
market during the summer months, just as coffee drinking in the northern
hemisphere hit’s a low point.
Who wants to drink hot coffee in the summer, right?
Do a bit of research and you’ll find something interesting. More than
80% of the time, coffee prices fall during June and July.
So what does all this mean?
Demand from China is growing and new supply takes seven years to develop.
Long term, I’ve got no doubt coffee prices are heading higher. However,
we must be cautious about picking entry points. June and July are
historically low points for the coffee market. Consider using this
trough to establish a position. Coffee looks like a big winner to me –
I’d bet my coffee mug on it.
• Soft Drink Industry (Down 2%)
In the last month, we’ve seen the markets move higher… while the Soft
Drink Industry moved lower? What’s the reason behind the move? Simply,
investors shifting money out of normally defensive investments like Coke
and Pepsi (the big boys in the industry). Investors are shifting from
fear to greed, and that means moving from safe stable companies to more
aggressive opportunities. I’m expecting this to continue for some time.
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