The Coffee Conundrum


Water, water, everywhere, and not a drop to drink.  Such a dire picture represented the coffee industry fairly well as little as six months ago, when a widespread drought in key java-producing nations put a severe shortage to global supply and jacked up the price of your daily dose of caffeine by as much as fifty percent.  Brazilian stockpiles dwindled as the normally-wet nation saw a dry spell that sucked moisture from Atlantic currents and dried up the resulting production of thirsty coffee beans.  Today, however, the pendulum of economics has swung fiercely back to the opposite point: coffee hit 52-week lows in May, plummeting from $2.20 in September of 2014 to $1.26 today.  With coffee firmly in a bear market, does the current climate (both economic and precipitation) suggest buying low?

From The Top

Long before the Dow Jones Industrial or Forex markets, coffee represented one of the most profitable commodities to invest in throughout the entirety of the world.  European markets became hooked on coffee around 1600 after the pope himself tasted the beverage and deemed it appropriate for civilization.  The spread of coffeehouses throughout the continent allowed for a center for political debate and a network of wealth accumulation for those who hauled the beans some fifteen thousand miles from their growth regions.  The island of Java lends itself to the name for a cup of coffee thanks to the first large-scale coffee plantations developed in modern-day Indonesia by Dutch commodity traders.  America's own Boston Tea Party in 1773 spurred the large-scale consumption of coffee thanks to the effort to boycott the distinctly British tea competition, a trend that has continued to this day.  While Finland may lead the world in coffee consumption per capita, the US owns the top spot as the largest consumer overall.  The history of the commodity is a history of particularly steep peaks and valleys.  Since coffee intake doesn't cease during recessions nor amp up during economic booms, the largest changes to the price have to do with the weather conditions needed to put a bumper crop on the market.  In 1977, for instance, coffee leaped above $3 per pound (without adjusting for inflation, mind) after a nasty frost made production scarce. 

Global Stocks of a Global Commodity

Most consumer commodities, such as cocoa and sugar, have fairly limited ranges of growth.  While you can't exactly grow coffee in your backyard, there are fewer limitations on coffee than some of its sibling commodities.  That's made a variety of nations into unlikely titans on the coffee market.  While Brazil remains number one with a number of bullets -- at half a billion pounds per year, they generate as much coffee as the next three nations combined -- there's some names on the list that you may not expect.  Vietnam, for instance, clocks in second place with nearly 300 million pounds a year.  The Vietnam harvest has influenced the market proportionately in recent years: the El Nino phenomenon created a much wetter growing season in 2014 that's responsible for a great deal of the price drop.  The US Department of Agriculture's Hanoi bureau (yes, you read that correctly: the USDA maintains a Hanoi bureau) predicts a drier growing season this year with less output, meaning that Vietnam will likely again influence the price in a big way throughout 2015.  Like Vietnam, India has emerged as a global player on the coffee market thanks to economic reform by the newly-crowned Modi administration that allows better access to subsidies for cash crops.  What's more, they offer more supply for the market since the Indian harvest occurs during March while most other worldwide harvests take place in autumn, meaning that price spikes in spring once stockpiles dry up may be a thing of the past as India expands their coffee growing empire. 

Deficits and Surplus

Volcafe, the coffee division of the Swiss ED+F commodities analysis network, announced their prior prediction of a global coffee shortage to be in error.  News of increased Brazilian output drove Volcafe to determine that a surplus of the commodity would likely keep prices low through 2016, suggesting that the prior deficit figure of 6.4 million bags should actually be a surplus that outpaces demand by over one million bags (one bag represents approximately 150 pounds of coffee).  That caused coffee prices to drop by no small margin on the commodity futures market, closing with a 5% loss on the day of the report's publication for a 15-month low.  This figure comes on the suggestion that nearly every coffee-producing nation will enjoy a strong 2015 growing season: Columbia, for instance, will grow from about 12.7 million bags of coffee to a clean 13.0 million bags, while Indonesia enjoys a growth of just over 1%.  Concerns over the Vietnamese dryness spells, Volcafe believes, may be mitigated by better irrigation efforts put forth by the government. 

Going Forward With Coffee

With few shortfalls in place, it appears that the price of coffee will likely not spike as it did in 2013 and pay rapid dividends.  It's worth remembering, however, that the element of weather adds significant volatility to the price of coffee (as well as other soft commodities).  Predictions of good climate haven't held up throughout the past, furthermore.   Look no further than the famous El Nino of 1997, which sent coffee prices spiking to the glee of investors who had predicted a conservative year while leading meteorologists to scramble to come up with an explanation (and name) for the weather pattern.  Since volatility represents the norm rather than the exception for coffee commodities, it's worth getting into coffee today to play the long game.  It may take a year or two or even five for a significant climate phenomenon to create a global shortfall, but the very real likelihood of doubling or even tripling your money makes coffee an appealing prospect whenever you can buy as low as you can on today's market and on today's margins.

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