By David J. DesLauriers –
TORONTO (ResourceInvestor.com) — After reaching their nadir in December 2001 with an all-time contract low of 41.5 cents, coffee futures have rebounded smartly. The price of a pound of coffee doubled in the past year recently peaking at $1.50, and settling back into the $1.20 range. While it would appear that there may still be some profit taking ahead, the longer-term picture looks quite attractive.
Commodity expert Jim Rogers has ‘bean there, done that’. He saw coffee at its all-time high of $3.25 per pound in 1977. Today, he is quite bullish and believes that that mark could well be surpassed in real terms.
“With the price of coffee below the costs of production for years, coffee growers in the 14 or so major coffee-exporting countries around the world have been quitting the business in droves.”
Brazilian coffee growers, the world’s largest exporters have been replacing their coffee trees with sugarcane and soybeans, and the Colombians have been supplanting coffee trees with coca plants.
Coffee is unlike sugar or some other agricultural commodities. Just as a new copper or gold mine, once discovered, takes years to bring on stream, coffee trees take 3-5 years to start yielding beans. That means that as coffee prices rise, the new production will simply not be there.
For this reason, the effects of the shortage created by all of the growers that left the industry during the glut years of low prices is beginning to be translated into higher prices for the consumer. The International Coffee Organization projects that global coffee production will fall somewhere between 105 and 107 million bags in the 2005-2006 season, with demand anticipated at around 120 million bags. This should continue to eat away at global inventories, which are already at their lowest level in more than 15 years.
As inventories continue to decline, there are two X-factors which could play well for speculators. The first is the weather. Jim Rogers says in his book Hot Commodities that the coffee bean is very fickle indeed. It is “the original middle-roader – not too hot, not too cold, just the right amount of rain.” A study by Salomon Smith Barney found that the in the 20th century there have been 17 “major freezes” or about one every six years. Meteorologists realize that we are due.
The second X-factor, of course, is the one that plays a part in the fate of almost every commodity these days – China. Right now China accounts for only one percent of world coffee consumption, but the popularity of the drink appears to be increasing. Starbucks (NASDAQ:SBUX) has been able to find enough Chinese coffee drinkers to justify opening 160 stores there since 1999. Coffee producers are hoping that China will go the way of Japan which emerged from a traditional tea-drinking nation into what is now the world’s third largest consumer of coffee. If this happens, watch out. As investors know from any promotion involving China, multiply something by a population of 1.2 billion and the potential reward is always humongous.
All in all, there appear to be good reasons to be in the coffee market, as a decade of low prices is finally righting the supply/demand picture, and it will be years before production rises to the necessary levels. Add to that the consequences of an intervention by Mother Nature or a new coffee-drinking zeitgeist amongst China’s burgeoning urban middle class, and one can see how things could really start to percolate.
Trendy chaps who indulge themselves daily at Starbucks should not be surprised to see a rise in the price of their mocha-half-frap-no-fat-latte, but may well be able to counteract that painful eventuality with a timely and well-placed speculation.
Source: Resource Investor