The Odd Confluence of Coffee and Beer

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Do Americans love any two chemicals more than caffeine and alcohol?  Not only are we among the world leaders in consumption of coffee and tea, but we also pack away more beer overall than any other nation in the world.  The combination of these two substances, furthermore, fuel the American economy by boosting productivity on the one hand and recreational spending on the other.  If you thought the market couldn't handle another influx of uppers and downers, however, the spirit of innovation has broken through to a new degree.  Cold brew coffee has turned a corner to become a mainstream option, offering the jolt of coffee in addition to the soothing support of beer, with a far better market share than predecessors (including the now-illegal Four Loko drinks).  That's provided welcome news in a late summer coffee market that hasn't had much good news in the past six months.

Preceding Events

If you could identify one single factor that has built modern civilization, what would you choose?  Perhaps the printing press or the telephone or the harnessing of electrical current.  While all of the aforementioned technologies rightfully deserve their spot in history, they all in turn owe a great debt of gratitude to coffee.  That's because the mass harvest of coffee by European colonies created a huge market for a daily (or hourly) dose of caffeine.  The incorporation of such a strong stimulant into everyday life, often replacing the depressant of alcohol, fueled greater creative efforts and new inventions.  No less an innovator than Benjamin Franklin remarked that coffee proved "one of the most valuable luxuries on the table...inciting cheerfulness without intoxication, and never followed by sadness."  Franklin, of course, loved the sauce as well -- "beer is proof that God loves us all" may be his most famous quote -- but the incorporation of coffee into the Enlightenment thinkers of the day proved to be a valuable tool for building everything from American democracy to the cotton gin.  Coffee has yet to supplant beer as the second-most popular drink in the world (the first being water), though not for lack of trying.  Today, some 100 million people depend on coffee as a primary source of income, whether farming the crop or dispensing lattes at Starbucks.  More still may find their livelihood dependent on it if cold brewing takes off due to the higher demand for beans.

Best of Both Worlds

For the better part of two decades, major corporations have tried and tried and tried again to mix together caffeine with alcohol to make a potent beverage and a potent sales market.  The law has come down hard, however, on some of the largest success stories.  The Four Loko energy drink contained not only the equivalent of two shots of espresso but also a punishing 8% ABV at first, leading to legislation outlawing the drink and forcing the company to cut back sharply on the caffeine content.  Perhaps the most famous of the success stories is Sam Adams' Black and Brew Coffee Stout, a modestly successful enterprise by the Boston Beer Co. (SAM on the NYSE, trading for $233.35 a share).  Where the biggest brands failed, however, the smaller brands have picked up the slack and ran with coffee cold brew.  Independent breweries with a far more flexible business plan have spread the confluence of beer and coffee across the United States.  While the nature of an independent brewery makes much of their success anecdotal in nature, stories like that of Pete's Tea and Coffee -- where their cold brew sales spiked by 70% in a year -- suggest that the trend appears here to stay.  Starbucks' Stoutaccino is under testing with the very real possibility of breaking the doors open on cold brewing.  That's great news for the coffee industry due to the fact that cold brewing requires significantly more beans.

Making A Cuppa

The Keurig machine at your office may provide a welcome pick-me-up, but it hasn't picked up any investor's commodity portfolio.  Despite the fact that Keurig cups are fantastically wasteful -- the world trashes enough Keurig cups each year to stack to the moon and back -- they are also fantastically efficient and deliver more coffee from less beans.  They've been bad news for coffee commodities writ large due to the rapidly gaining market share, but cold brew coffee offers a welcome reprieve from the slacking demand.  Cold brewing requires steeping freshly-ground beans in water for up to 24 hours, while traditional coffee brewing requires only that hot water be poured over the crushed beans.  The change in the process means that each bean provides less flavor and caffeine, forcing cold brewers to acquire more and more stock to provide their customers with the daily cup.  That makes the cold brewing technique promising on several fronts: first and foremost, it consumes more beans than its predecessors.  Second, it allows more consumption from a wider audience thanks to the inclusion of beer.  Third, it favors warmer weather, which traditionally has been the bane of coffee.

Pick Me Up

  • Coffee commodities have turned the corner and increased demand for the beverage has began in the United States.  The spread of this trend to the rest of the world will only further the demand for more and more coffee in the cold brewing process, accelerated by major companies launching coffee-beer hybrids to lap up the new market share.
  • Coffee traded on 18-month lows only one month ago.  The price has began a slow climb in the weeks since then, indicating not only does the commodity offer an excellent value buy but that the upward trend has already began.  The longer an investor waits to put coffee in their portfolio, the more they'll be charged for the privilege. 
  • Coffee usually gains further value in the winter months, making it a superb option for growth well into 2016.  Double down on stocks of coffee-producing companies in order to profit on two fronts from the cold brewing craze.

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