- It's a three- to four-year-long process to harvest, refine and produce coffee beans for consumption.
- You can add exposure to coffee through stocks, ETNs or futures contracts.
- Coffee prices are influenced by a number of factors, especially weather and climate.
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The best part of waking up isn't Folgers in your cup — it's seeing stock futures up.
Many investors start every day looking at charts or market news over a fresh hot cup of their favorite caffeinated beverage. Coffee can also be rewarding in more ways than one, as many coffee makers and shops are publicly traded and can be good stocks for balancing out a diversified portfolio. Want to know more about how to invest in coffee?
In this article, you'll learn about investing in coffee, how companies are influenced by the coffee commodity price and how investors have multiple asset classes to consider.
Overview of Coffee Investing
Before making a coffee investment, let's learn how that hot cup winds up on your table or desk. Many of us take coffee for granted since its supplied by many businesses and companies for free or can be purchased for less than $2 at most convenience stores. But despite how easy it is to quench your caffeine thirst, the process of going from bean to cup is intricate and relies on multiple industries.
For starters, coffee beans aren't beans — they're seeds that often take three to four years to grow and harvest fully. If you're reading this article over a coffee right now, the process to get you that cup began years ago in South America. Coffee harvests usually occur once a year, and the harvested beans must be processed, dried and milled before being exported. Once exported, taste testers perfect coffee through taste tasting, and the approved beans are roasted and ground up for brewing.
Getting the beans from the ground to your cup is a long and complicated journey, and coffee prices can be fickle due to the number of factors involved. That's why coffee investors must keep an eye on the commodity price and the business prospects of coffee-related stocks they own.
Coffee Investing Methods
You'll have plenty of options if you're looking to invest in coffee-adjacent securities. But derivatives like futures and leveraged vehicles like exchange-traded notes (ETNs) aren't for novice investors, so understand how futures contracts or ETNs work before buying any.
The easiest way to gain coffee exposure is simply by learning how to invest in coffee stocks. Coffee stocks range from cafe chains, homebrew equipment, and giant consumer staples food producers. The most prominent coffee stock on U.S. exchanges is likely Starbucks Corp. NASDAQ: SBUX, with its $118 billion market cap and 36,000 stores worldwide.
Starbucks is far from the only offering, though. The J.M. Smucker Company NYSE: SJM is a large-cap food company owning renowned coffee brands like Folgers, Dunkin' and Cafe Bustelo. And the biggest coffee stock of all isn't even a United States company - it's $337 billion Swiss giant Nestle S.A. OTC: NSRGY, responsible for the Nescafe, Nespresso and Blue Bottle Coffee brands, as well as CoffeeMate creams and sweeteners.
Commodities can be bought and sold as products and as tradeable securities. While buying and selling raw materials like coffee, gold or oil is usually left to businesses, investors can bet on the price of these commodities through futures contracts. A futures contract is an agreement to purchase a particular commodity at a specified price at a certain future time.
Futures contracts usually go month-to-month, and you aren't required to deliver the commodity if you hold the contract until expiration. However, futures are complicated derivatives; you should only trade them if you fully understand what you're doing.
Coffee ETF and ETNs
Investors used to have access to more exchange-traded funds (ETFs) and notes (ETNs) with coffee themes, but most have dried up. Investors could use ETNs to invest in coffee futures without needing a futures trading account, although many of these funds used leverage and weren't suitable for new investors.
The iPath Series B Bloomberg Coffee Subindex Total Return ETN NYSE: JO was one such security, which tracked the price of coffee through this bond-like instrument. However, JO stopped trading at the security matured in June 2023, and Barclays forced investors to take redemptions.
You can still gain coffee exposure through ETFs and ETNs, but the securities are more broadly focused. The Invesco DB Agriculture Fund NYSE: DBA devotes 5.5% of its holdings to coffee futures contracts, so you must decide if you're comfortable with exposure to sugar, cocoa, cattle and other agricultural products.
Steps to Invest in Coffee
Looking to add some coffee exposure to your portfolio? Here are the steps to take to get started.
Step 1: Plan for your coffee investment portfolio.
To be a coffee investor, you'll need a plan for adding coffee-related securities to your portfolio. Investments influenced by commodity prices always require extra consideration since coffee futures can be volatile. How long do you plan to hold your coffee investments? Is this a short-term trade or more of a long-term move? Once you know your timeline and the capital you're putting in, you can move on to the next step.
Step 2: Decide which type of security to invest in.
What's your investment expertise level? If you're starting your investment journey, you might prefer coffee stocks or consumer staples ETFs that include coffee companies. But if you have experience with derivatives or leveraged products like ETNs, you can also consider these in conjunction with equity-based investments. Only invest in a security if you understand how it is structured.
Step 3: Research coffee companies or funds you want to buy.
Before you invest in coffee stocks, you'll need to research the different companies and funds that fit your portfolio parameters. For example, here's Keurig Dr. Pepper Inc. NASDAQ: KDP, which counts the at-home Keurig coffee system among its beverage product lines.
KDP has rewarded its shareholders well over the last decade but with plenty of volatility. What factors could influence KDP future performance? How has inflation affected the company's margins? It's easy to tell where a company has been, but determining where it's going requires due diligence.
Step 4: Buy your assets and monitor commodity prices.
Once you've decided which securities to invest in, you must purchase them through your brokerage account. You can purchase stocks, ETFs and ETNs through a traditional online brokerage account, but futures require a special account type. Many brokers allow equity and futures trading, but you'll still likely need specialized account permissions to invest in both on the same platform. Once you've invested, watch the coffee commodity price, too.
Factors Affecting Coffee Investments
Some factors that affect coffee investments include:
- Commodity prices: The factor placing the most pressure on coffee investments is the price of coffee itself. Coffee spiked to a high of $2.47 in August 2022 and then cooled off to $1.50 by Thanksgiving. Volatile prices can make it difficult for public coffee companies to estimate budgets and costs.
- Inflation: All companies feel the pressure from inflation one way or another, and coffee stocks are no different. For producers, material and labor price fluctuations can cause uncertainty. For shops and cafes, inflation can influence their ability to hire workers, maintain properties and purchase goods like packaging and equipment.
- Climate: Coffee starts as an agricultural crop, and companies depend on quality weather to maximize harvests. If drought and inclement weather impact the annual harvest, commodity prices can become volatile quickly.
Pros and Cons of Investing in Coffee
Before pouring any capital into a coffee investment, here are some benefits and drawbacks.
The benefits include:
- Growing industry: The coffee industry has taken in $11 billion in total global revenue in 2023, and the market should grow by more than 3% annually through 2028.
- Variety of investment methods: Coffee investors can purchase individual company stocks, ETNs, agriculture ETFs or future contracts to gain exposure to this commodity.
- Domestic and international stocks: Investors can buy companies located in the United States, like Starbucks or Keurig, but also international giants like Nestle.
The potential downsides include:
- Volatile commodity prices: Like most agricultural products, coffee prices can be volatile from year-to-year depending on the success of the harvests. Poor harvests result in lower supply, pushing the price and increasing costs throughout the industry.
- Climate change concerns: Since weather is a crucial factor in growing coffee beans, climate change has become a concern for coffee producers and sellers. If inclement weather becomes more constant, the industry could become very unpredictable.
- ETNs and futures not for beginners: If new to investing, there might be better places to start than leveraged products and derivatives. These instruments have complex structures and could erode your capital quickly if you don't fully grasp how they work.
Tips for Investing in Coffee
Ultimately, the major tips for investing in coffee include:
- Understand what you're buying.
- Have clear goals and timeframes.
- Know the risks and potential headwinds/tailwinds for coffee investments.
Does this mean that you'll pick it all up right away? Investing in coffee requires studious research, intelligent market-based choices and possibly even an understanding of weather!
Coffee Investments: Require Strong Ideas
You likely know more than a few people who can't function properly without their coffee.
Coffee is an important part of many mornings, but just because a large population can't go without their caffeine fix doesn't mean coffee investments are easy money. Like any investment, coffee stocks, ETFs, funds and futures require research, planning and proper execution. If you want to make money trading securities heavily influenced by a commodity price, you must be thorough and stick to the plan once it's established.
Still looking for the ideal way to get into coffee investing? Here are a few frequently asked questions by inventors looking to add coffee-adjacent securities to their portfolios.
Is coffee a good investment?
Before you invest in coffee, consider your timeline and investment goals. Even the best coffee stocks may not suit your investment parameters, which could result in taking on too much (or too little) risk in your portfolio.
How do you invest in coffee prices?
If you want to invest in the actual price of coffee beans, you'll need to trade coffee futures contracts on a commodities exchange. Like any other commodity, coffee prices can be volatile, and traders use futures contracts to bet on the price in the coming weeks or months.
Is investing in coffee for beginners?
It depends on the type of security you want to invest in. Futures contracts and ETNs are complex products that involve leverage and may not be suitable for beginners. However, beginner investors can access large-cap publicly traded coffee companies like Starbucks or Keurig Dr. Pepper, which carry risks but don't have the complications of leveraged securities.
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