I learned today that Colombia’s environmental agency IDEAM is predicting unseasonably scorching hot weather to take Colombia through February and into March. When temperatures lighten up in April, they’ll be followed by rain showers, but even those will be below the average for this time of year. This announcement comes in the wake of ongoing forest fires at a high and major rivers at a low.
It got me thinking about an investment book I once read that said if there is unseasonably high rain in Brazil, buy shares of Starbucks. See why? If not, it’s good to learn about the coffee investment and I know I needed the refresher.
Coffee trades as a commodity on the New York Board of Trade. It trades alongside other commodities like oil, sugar, cocoa, metals, etc. When you invest in coffee as a commodity, you are buying what’s called a futures contract, a standard contract to buy or sell a certain amount of coffee at a specific future date for a specific price. The coffee in question is green, unroasted coffee since the idea before a commodities market is that the commodities are unprocessed for the most part. Once you roast coffee, you’re processing it on its way to the retail market and into the cupboards of coffee drinkers everywhere.
There are investors who see coffee investment plays and the price of a futures contract is generally used by coffee exporters to determine the price of coffee. There are some generally accepted standards for what coffees can go for a premium over the commodity price and what coffees can go for a discount. However, the one thing that generally doesn’t change is what we consumers pay for coffee. It would be a crazy world if you didn’t know the price of your cup of brewed coffee or pound of whole bean coffee until you got to the cashier and he needed to check the commodities exchange for the latest price. What that means is that the buck stops at the consumer. Larger retailers can flex their muscle and insist on standard or fairly standard prices so that they don’t have to deal with the price fluctuations.
But at some point, somebody between the exporter in the coffee-producing country and the retailer that sells the coffee to consumers has to deal with these fluctuations. It the commodity price jumps, you and I pay the same for our coffee but people in the chain make less money for themselves. If the commodity price drops, you and I still pay the same but people in the chain make more money for themselves.
So if it’s raining unseasonably in Brazil, the world’s largest producer of coffee, then coffee farmers will have more coffee to harvest than what was estimated. This will increase the supply of coffee to the world, so that if demand for coffee stays the same, the commodity price of coffee will drop. Supply high, demand same, price drops – if supply drops then there is less of that thing and therefore it fetches a higher price. So in our example, the world’s largest coffee retailer Starbucks will pay less for the coffee they buy but charge us the same for the coffee that we buy from them. That means when it’s raining unseasonably in Brazil, Starbucks will make more money that year and you should invest in them before they do so you can share in the profits as a shareholder.
So all of this came to mind today when I learned about the heat wave about to continue in Colombia. Colombia is now the world’s third largest producer of coffee after Vietnam, and a large supplier. This weather news does not bode well for Colombia’s coffee crops and consequently, the supply of coffee to the world. If Brazil can’t pick up the slack, there will be a lower supply of coffee in the world and provided demand stays the same, an increase in coffee prices.
I went to the Intercontinental Exchange, which lists commodity trade charts. For news likely unrelated to what’s going on in Colombia, the price of coffee has been dropping all day…a good time to buy a contract in light of the news out of Colombia? It will take a finer investment mind than me to answer that question, but I’m thinking of dabbling in the commodities market for the first time in my life.