- Written by Sara Nunnally, Editor, Insiders Strategy Group
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I'm in some serious need for coffee this morning... And if I want it, I'll have to go get it. I'm pet-sitting for a friend while she and her husband are out camping in North Dakota. They're tea drinkers -- not that there's anything wrong with that.
I, too, occasionally have a cup of tea.
But today, I need coffee. First night in a strange house with a 110-pound Anatolian Shepherd shifting around next to me... I was in and out of sleep from 2:30 on, and the pups decided to get up at quarter til six.
As soon as I'm done writing you, I'm finding a Starbucks.
I won't be paying more for my coffee just yet, even though prices have bounced sharply off an anemically low $1.50/lb.
Since mid-June, coffee prices have climbed nearly 40 cents a pound. That's more than 26%.
The jump coincides with climbing grain prices (as Bill mentions, corn and soybeans have hit fresh highs). But there are some supply and demand issues at work with coffee, too.
From The Wall Street Journal:
Companies are turning to exploration to ensure future coffee supplies because production has leveled off even as demand has increased, causing coffee-bean prices to quadruple since 2001.
The world consumed 17.6 billion pounds of coffee beans last year, up from 2.6 billion in 1982, according to the U.S. Agriculture Department. But production in Colombia, which provides 10% of the world's Arabica beans, has dropped 36% since 2005. Output in Brazil, the world's leading Arabica producer, recently hit a four-year low.
Now companies are looking for more strains of coffee that might be more tolerant to temperature changes and other climate concerns like drought.
And they're looking in remote places, like high on a plateau west in the Upper Boma mountains in the South Sudan. The World Coffee Research has collected about 75 different wild coffee samples and hopes that it might have found a forgotten strain that could help coffee growers maintain healthy and productive crops through a variety of growing conditions.
If it sounds hokey, it's not, really. The group's trip to the South Sudan area may have come just in time.
Much of the old rain forest has been converted to crops like bananas and nuts, or has been given over to graze cattle. The small strips of old forest left are beaten by drought.
It's no wonder that World Coffee Research is attracting coffee companies from around the world. Everyone from Green Mountain to Nestle to a little-known Italian espresso company is in on the game.
But the biggest name in coffee isn't a part of the group: Starbucks.
The reasons for this aren't clear, but we do know that Starbuck has wanted to patent the name of an Ethiopian coffee region for its own use.
It also wants to grow coffee in the Hunan province in China.
Clearly, Starbucks has its own agenda.
But as growing conditions keep changing, Starbucks might change its tune. Coffee needs biodiversity. It's been said that all the coffee produced in the world (outside of wild strains) came from two plants -- one from Indonesia that found its way to Europe, and one from Yemen that ended up in Brazil.
This near mono-culture of coffee strains means prolonged climate issues, and any disease or infestation for that matter, could wipe out whole swaths of crops.
Last April, I told attendees of our Natural Resource conference in Toronto that they should put coffee on their radars.
Coffee is one of the most seasonally affected commodities traded in the futures market. The worst season to buy is in summer -- particularly the June and July months. This is because the Brazilian harvest arrives in May and June.
Check out this chart.
You can clearly see the big dip in coffee prices from mid-May through mid-June. That's because the Brazilian coffee harvest is expected to be big... strongly contributing to the 10 million-bag boost in production.
(A bag is basically 60 kg worth of green coffee. That means the boost in production could make more than 40 billion cups of coffee.)
At the same time, though, consumption and exports are supposed to be at record highs.
According to Edgard Cabanillas of Commodity Page, "Domestics consumption is also expected to rise for 2012/13 crop year at 141.7 mln bags vs. 138.9 mln bags in 2011/12 and 132.9 mln bags in 2010/11. Exports are also expected to rise to historical levels at 101.8 mln bags vs. 95.1 mln last year."
He thinks coffee prices could top $2 a pound within the next several weeks.
Traditionally, the best time to buy coffee futures is in October, after the Vietnamese harvest comes in, and sell in December; or to buy in February and sell in May, before Brazil's harvest. But this somewhat depends on how much coffee Vietnam can put to market, and crop estimates in Brazil. Estimates for both Brazil and Vietnam can be found in analysis from the USDA, among other sources.
But if you're futures-savvy, you might be able to play the 10-cent pop over the next couple of weeks.
If you're not, take a look at wholesalers, like Coffee Holding Company, Inc. (JVA:NASDAQ), or the several exchange-traded assets, like iPath DJ-UBS Coffee TR Sub-Idx ETN (JO:NYSE) and iPath Pure Beta Coffee ETN (CAFE:NYSE). But be careful... not all of them are liquid.
P.S. Biggest "Boondoggle" of All Time? Congress, billionaire investors and an oil tycoon -- this doozy of a story involves them all Key players want a new energy bill "fast-tracked" through Congress so Obama can sign it ASAP. Once he does, a motley crew of bigwigs will roll in the dough! I'm naming and shaming today. Plus here's how to grab your share of the untold riches.