Coffee trading: how can you invest in coffee?
An awful lot of people get up every day with a cup of coffee. Did you know, for example, that after oil, coffee is the most traded commodity on earth? This popularity, combined with the fact that the supply fluctuates depending on the quality of the harvest, makes it very attractive to invest in coffee.
How can you invest in coffee?
There are different ways to invest in coffee. You can choose to trade directly in the price of the raw material. It is also possible to buy shares of companies that are active in the coffee sector. Finally, it is possible to invest in a fund that deals with this commodity.
Active trading in coffee
It is obviously very impractical to have bags of coffee delivered to your home. Buying all the packs of coffee in the local supermarket is also impractical.
Fortunately, there are practical ways to invest in coffee. Trading in coffee is usually done using derivatives.
Derivatives are contracts on, for example, a commodity in which you only trade in the underlying price and not in the commodity itself. That way, you don’t have to worry that kilos of coffee will be delivered to your house.
You can trade these contracts or CFDs with an online broker. A good online broker to trade coffee with is PIus500. PIus500 is a broker where you can trade CFDs on all major commodities. You even have the possibility to take a short position with this broker. When you take a short position on coffee you obtain a positive result when the price of coffee drops. This makes it possible to benefit from trading coffee in any market situation.
You can try trading in coffee entirely risk-free with a demo at PIus500. Use the button below to open a free demo instantly:
Buy coffee shares
You can also choose to invest in coffee shares. Various companies are active in the production and sale of coffee. However, not all companies are purely dependent on the price of coffee. Smuckers, for example, is known for jam, but is also the owner of Folger’s coffee brand. Nestle also earns quite a bit of money with coffee, but also has dozens of other products in its assortment.
Before you buy coffee shares, it is therefore important to thoroughly investigate what the company is doing. Investigate whether the company has good prospects for the future and research how the company is doing financially. By investing in a company that operates a variety of products, you spread your risks.
After you've decided that you want to buy a certain amount of coffee, you still have to choose a broker. It is always wise to choose an advantageous broker. A broker is a party that makes it possible to buy shares. It is advisable to use a broker like eToro. With eToro, you don't pay commissions at all, which allows you to achieve a higher return. Use the button below to open an account directly:
Investing in funds or ETFs
You can also choose to invest in coffee through a fund or ETF. A well-known example of a coffee ETF is the Dow Jones-IBS Coffee ETN. This fund tracks a coffee future every month and automatically rolls the contracts forward to the next period.
Another option is the Pure Beta Coffee ETN. This fund is somewhat less transparent, because the contracts do not automatically roll over every period. The fund makes decisions based on fluctuations in the price associated with the storage of physical coffee.
Futures in coffee
I myself would never recommend the novice investor to invest in futures. With futures, you have the obligation to buy at the end of the term. If you are unexpectedly unable to sell the contract, you are suddenly stuck with a cargo load of coffee.
One future is based on 37,500 pounds (ca. 17 t) worth of coffee. This means that you need a considerable amount of money to invest in coffee with futures. CFDs are therefore a more attractive option for most non-professional speculators.
What do you want to do about investing in coffee?
- Advantages of coffee: what are the advantages of investing in coffee?
- Price of coffee: how does the price of coffee come about?
- Risk: what should you look out for when you trade coffee?
- Shares: which coffee shares can you buy?
- Pricing: what is the current price of coffee?
Investments in coffee can be good. Below, we discuss why it can be interesting to invest in coffee right now.
Coffee is a basic product
Coffee is seen by many people as a basic product. Because of this, even in economically bad times, there is a great demand for coffee. In large parts of the world, coffee is seen as the perfect drink to start the day with. As a result, the price of coffee will never approach zero. Therefore, a long-term investment in coffee does not have to be very risky.
Rising world consumption
Worldwide there are more and more people who can buy extra, more luxurious products. In emerging economies such as China and India, more people drink coffee. As a result, the global demand is increasing. If we follow the economic trends, it seems that these regions will only become more prosperous. As a result, the market for coffee will continue to grow. The global consumption of coffee is therefore increasing by an average of about two percent per year.
A benefit of trading in a commodity like coffee is the transparency. Because it is a physical product, it is easier to understand how supply and demand influence the market. It is therefore easier to understand the development of the price of coffee than the development of the price of a share.
The price of coffee can fluctuate a lot. In 2011, a price of over $280 was reached, while in 2020 the exchange rate dropped to $100. Smart traders know how to take advantage of these kinds of fluctuations. By buying at the right time, you can achieve a considerable profit. Moreover, it's possible to take a short position. With a short position you can achieve a positive result when the price falls.
Protection against inflation
Investing in commodities such as coffee can protect you against inflation. Money in your bank account will lose its value over time. However, the prices of raw materials rise along with the general price increases. In addition, by investing in coffee, you can apply further diversification to your investment portfolio.
The price of coffee is determined by the interplay of supply and demand. When more coffee becomes available because of a good harvest, the price may decrease. At the same time, an increasing demand will cause the price to rise further in the long term.
The exchange rates of the pound and the dollar also play an important role. Coffee is traded on the London and New York stock exchanges. When you buy coffee in another currency, the exchange rate can play a major role in determining your result.
In most cases, you invest in the largest and best-known type of coffee: Arabica coffee. 70% of the worldwide trade is related to this type of coffee. The remaining 30% consists mainly of Robusta coffee beans. It is cheaper to produce these beans, but the quality is also a bit less. The type of coffee in which you trade can therefore also influence the price.
Most of the coffee production takes place in more tempestuous regions. For example, you will find many plantations in Africa and South America. Political instability and crop failures can be a direct threat to the supply of coffee. As a result, the price of coffee can suddenly rise sharply.
When trading in coffee, it is therefore important to keep a close eye on these international developments. Scarcity can make the price of a commodity rise significantly.
We saw a good example of this in 2009 when a fungus started to grow on the coffee leaves in South America. As a result, many farmers lost the beans even before harvest. Yields fell by up to 40% in some regions.
Monoculture and the use of chemicals can make large areas unsuitable for coffee production. If farmers in these regions do not respond to these threats properly, there is a high chance that coffee prices will continue to rise.
In this part of the article, we look at some coffee shares in which you can invest. Investigate the company thoroughly before you decide to buy the shares.
Buying Starbucks shares
Almost everybody knows Starbucks, and this is not surprising. Starbucks is the largest and most important coffee related company in the world. With approximately 20,000 locations worldwide, drinking coffee at Starbucks has become an experience. Coffee drinking is more popular than ever, especially among millennials.
However, the trend seems to be reversing somewhat. The same group of young adults wants to drink in a conscious and responsible way. They are looking for organic and local coffee. As a result, Starbucks seems to be losing their market share to smaller, local players in several regions.
Do you think Starbucks still has a lot of growth potential? With new competitors such as the Chinese Luckin Coffee, Starbucks can’t sit back too much.
With the brand name Dunkin’ Donut, you wouldn't immediately think of coffee. Yet this company is the number two in America when it comes to companies that are active in the coffee industry. Unlike Starbucks, Dunkin’ Donut works entirely with franchises. As a result, the operating costs are very low.
Also in the case of Dunkin’ Donut you see that other, smaller providers are becoming more popular. Due to the strong position of both Starbucks and Dunkin’ Donut, however, it does not seem that the companies are in any way in trouble.
Luckin Coffee was a very attractive investment opportunity for a long time. The company was able to conquer a large market share quickly and opened shop after shop. After a major fraud scandal, however, the price fell dramatically. This shows that when you invest in shares, it is important to monitor the performance of the company. Even when the coffee price or coffee market is doing well, a company like Luckin Coffee can achieve bad results.
Is it wise to buy coffee stocks?
Whether it is wise to buy coffee shares depends on the market. Large coffee companies are expected to continue to do well. However, it is important to remember that the price of a share is determined by what people are willing to pay for it. When other investments become relatively more attractive, the price of coffee shares may still fall.
Are you curious about the current price of the raw material coffee? In the graph below you can see at what rate you can buy coffee with CFDs. By using the buttons you can immediately open a position.
Success with coffee investments
When investing in coffee, it is important to keep an eye on what is on offer. A big advantage of coffee is the fact that many people are very accustomed to the drink; demand will therefore not suddenly drop extremely. It is therefore mainly the supply side that will determine the final price of coffee. Moreover, coffee is considered as a basic product that is also consumed during economically weak times. This makes it easier to predict the price of coffee than, for example, the price of a social media share.
If you want to obtain great results with coffee, it is important to follow the news and try to find out how the harvests are doing. A lot of coffee comes from Colombia, where they suffered from leaf rust for a long time.
Such an accident can have a strong influence on the supply side of coffee and this can bring the coffee price to new heights. In the meantime, they have succeeded in developing a rust-resistant shrub which has solved this problem.
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