Coffee is considered a staple of diets in both emerging and developed markets. The non-consumption uses of this commodity may be limited, but the massive intake for coffee has resulted in formation of a vigorous coffee futures market. Owing to the fact that uses of coffee tend to be so specialized, this commodity often attracts investors seeking for short-term investment opportunities by speculating on price changes that could arise due to demand and supply factors.
The coffee prices may experience big swings over shorter periods of time due to both supply concentrations, as well as potential impacts caused by extreme weather. The physical properties of coffee tend to make investments in beans impractical, however, there are still other options available for investors who are looking forward to gaining exposure such as futures, options, and exchange-traded products.
Different ways investors can invest in coffee
Investors wishing to invest in coffee may do that in different ways including investing in Futures, ETFs, and Stocks. Investors may want to invest in coffee by buying coffee stocks. While some commodities may allow an investor to gain indirect exposure to such resources through investments in companies engaged in the production, on the part of coffee, it may not be a viable option. The reason being that due to the nature of the coffee industry (where most global productions are done by small privately-owned companies or farmers), it would mean that purchasing of coffee stocks is quite impossible.
However, there are still a few options where investors can purchase stock such as the Tata Coffee Ltd. (TCO:IN), which is an Indian company that accounts for a considerable portion of the coffee bean production in Asia.
Exchange of traded products, on the other hand, offer an opportunity for investors to establish exposure within coffee prices without needing to worry about issues of rolling futures exposure when expiration approaches. Nonetheless, coffee ETFs tend to deliver exposure at some relatively low price points. These price exposures offer impressive liquidity as well as transparency. Investors in the U.S. have an option to pursue coffee exposure and this is through iPath Dow Jones-UBS Coffee Total Return ETN (JO).
Coffee futures are designed to help the producers to hedge their investment against price fluctuations. Coffee futures have a well-developed yet very liquid market, and the contracts may be used by those investors who are looking forward to adding coffee in their investment portfolio or simply speculate on fluctuations of prices in the short term.
Coffee futures are traded on New York Mercantile Exchange and the prices are quoted in U.S. Dollars for each pound. The world benchmark designed for Arabica coffee is the Coffee C contract.
Due to the increasing demand for coffee and its products, investors are positioning themselves to gain a competitive edge in the market.
JAB Holding Co. striving to rule the coffee global market
JAB’s billionaire backers want to establish a global coffee empire. The jointly held investment firm manages the fortune of the Reimann family, an Austria’s billionaire family and recently, it took a step to achieve its goal of dominating the coffee global market by acquiring Keurig Green Mountain Inc.. JAB offers an amount almost close to $14 billion in a deal that is considered one of the biggest in the industry.
In the past four years, the JAB Holding Co., a Luxembourg-based group has spent over $30 billion to acquire coffee companies in regions such as U.S. and Europe. Its aim in these acquisitions is to challenge the global leader in the coffee industry, the Nestle SA.
JAB Holding Co. is run by a trio of some well-connected executives that have a wealth of experience spanning for decades especially in the food and beverage sector. Some of the assets acquired by JAB include Master Blenders 1753 NV, a high-end chain Peet’s Coffee & Tea, and Mondelez International Inc.’s coffee unit.
A Susquehanna Financial Group analyst, Pablo Zuanic said that this move by JAB Holding Co. is part of a much bigger strategy the company is applying. This company is looking forward to being the “Budweiser” within the coffee space, added Pablo Zuanic when referring to the world’s biggest brewer, Anheuser-Busch InBev NV.
Just as Bud has consolidated beer, so does it want to consolidate coffee, according to a statement by Zuanic.
Projected coffee gain
While price wars as well as health concerns seem to have dented sales within the grocery market, on the other hand, the coffee market appears to be expanding at a rate of five percent a year. This is according to Euromonitor. The sales figures of single-serve capsules, which are delivered by machines designed by Keurig and Nestle’s Nespresso unit seem to be increasing at twice or more than the rate of five percent. The JAB’s coffee game is considered to have some deep-pocketed backers
JAB’s challenge to Swiss based company, Nestle
Nestle is a Switzerland based company and its challenge by JAB started in June 2012 when the latter purchased a stake in D.E Master Blenders 1753, an Amsterdam-based company. D.E Master Blenders 1753 produces and sells both tea and coffee products for retail as well as out of home markets within Europe, Australia, Brazil, Thailand, and other countries.
Recently, JAB combined Mondelez business, which is considered to be the world’s second largest maker of coffee and Master Blenders, which takes the third position to form a new company that has been dubbed Jacobs Douwe Egberts.
In the U.S., JAB runs a series of coffee shop chains, which include Einstein Noah Restaurant Group Inc., Caribou Coffee Inc., and Peet’s. What the company lacked, which now has been obtained in Keurig, is having a strong position within the single-serve coffee market, which is perceived as the industry’s fastest growing segment.
In general, JAB is aiming to build a powerhouse in coffee industry and presently, it is adding more extensive single serve coffee expertise.