Coffee is included in the list of most traded commodities around the world. That means it is in the categories of sugar, wheat, crude oil, gold, silver, and natural gas. However, for the most traded commodities, coffee lists as a soft commodity. This category of major soft commodities also features cocoa, sugar and orange juice.
Experts think that the movements in supply and demand for coffee will boost coffee prices in the global markets. For instance, weaker harvests of Arabica beans will lead to low supply and hence higher prices just as well as increasing demand for high-end gourmet coffee.
Production downgrades are also expected to lead to increased prices globally. Also, another factor to lead to high prices is the decline in global stocks for coffee.
As a major commodity, we can invest in coffee through a variety of alternatives. These include coffee futures, coffee options, coffee ETFs or ETNs, coffee shares, and coffee CFDs.
Examples of coffee futures that make popular coffee as a major commodity include Coffee C futures traded in the New York Mercantile Exchange (NYMEX) which is part of CME.
Coffee Options, which are derivatives, include Coffee C. Traders can employ leverage to invest in commodities, meaning they do not need to tie down much of their capital. iPath Dow Jones and iPath Pure Beta are the two most popular ETNs for coffee traders. There also are several CFDs and coffee shares for coffee traders.
Coffee as a commodity
Commodity trading refers to buying and selling either on exchanges or via derivatives. Although coffee lists among major others such as orange juice, oats and feeder cattle, some are more tradable than others.
That's because some circumstances limit traders from entering and exiting the markets anywhere they would like to.
Investing in coffee comes with one challenge to us: the fact that prices can be very volatile. Traders should, therefore, take this into account when intending to invest in coffee. It should guide investors about whether to invest or not and when to actually do it or not.
It might be good advice to invest in coffee as a commodity when intending to allocate some assets to commodities with the intention of diversifying investment.
Why we might want to trade coffee as a major commodity
Investing in coffee maybe after considering a few reasons: first is to bet on supply scarcity, betting on global growth, betting on improving health story, the Starbucks effect, and for purposes of diversifying your portfolio.
Hedging on supply scarcity
Only a few countries do supply coffee in the international supply market. This means the coffee is suitable to trade as a scarce commodity. Anyone can gain profits capitalizing on coffee scarcity. The reason for the scarce supply is that coffee has specific conditions for growing. These conditions are not favorable for the activity in all or most of the countries in the world.
Other conditions that may define scarcity are political upheavals that may disrupt prices and growth.
Betting on global growth
Is coffee a major commodity for Asia, Latin America, and Africa? Yes, but also these and other continents are huge emerging markets for commodities such as coffee because most of the countries in them are experiencing an expansion of their economies.
Since most countries are accumulating wealth in these continents, their coffee consumption will continue to rise. Traders can bet and invest in these opportunities where they expect an expansion of income from coffee.
Betting on increasing health benefits of coffee
The world is only beginning to understand the health and the potential health benefits of consuming coffee. For instance, it is helpful for business professionals, students, civic groups and other kinds of populations in their various endeavors.
It can help reduce the risk of cancer because it acts as an antioxidant. Antioxidants fight cancer by diluting or canceling out reactive oxygen in the body. Reactive oxygen damages body cells and, in addition to causing cancer this way, it can accelerate aging.
The Starbucks Effect
Coffee shops are taken as fun and productive places by consumers because they can meet there. We would bet on the many meetings that take place in coffee and Starbucks outlets around the world. And given the likelihood of expanding consumption, these coffee shops will likely increase in number.
As a way to diversify your investment portfolio
I already listed most of the major commodities that list in the world's market scene alongside coffee as major commodities trading in major exchanges and as ETFs. If you want, one of the greatest investment pieces of advice of all times is to not put your eggs in one basket. And it works because when some products are proliferating others are waning.
Factors that can affect the prices of coffee
There are three long term trends that can boost coffee prices globally. These include global climate change, emphasis on healthy living, and growth of the emerging market.
Global climate change: The long shifts in climate change provide a rich opportunity for investing in coffee because they influence the supply of coffee. For instance, production is hampered by an increase in temperatures and unpredictable hurricanes.
Emphasis on healthy living: The world continues to understand the benefits of drinking coffee and this would push high consumption of the commodity. High consumption also directly converts to high demand, which pushes coffee prices higher.
Growth in emerging markets: Many developing countries report an expansion of their economies and the majority of their citizens are experiencing an increase in income and income opportunities.
Coffee will be one of the beneficiary products to such a trend especially when connected to factors such as more people understanding the health advantages of consuming coffee and the expanding of opportunities to invest in coffee such as those listed above.
Investing in coffee comes with several risks including a strong US dollar that could lower prices of coffee. Additionally, large suppliers could also depress coffee prices following the overproduction of the commodity.
Another risk is the weakening of economies which means low incomes for populations, and subsequently lowering of consumption. Economic weaknesses can also weaken appetite in terms of disrupting diets.