Percolating Profits: The Demand For This Commodity Is Surging (JO, DBA, JJA, SBUX, GLD)
Kevin Kerr: In the world of commodities and resources, the demand for certain key items has increased exponentially as the global appetite for cars, homes, and better food has exploded. China and India, and the rest of the emerging markets, have been the biggest drivers of this new demand, as millions of consumers who never drove a car or had a proper home, now do.
Everything from gasoline to copper, and corn to cocoa, has seen significant spikes in demand year over year.
The recent pullback in global resource markets was more of a knee-jerk reaction to minimal slowing growth numbers out of China, rather than any real protracted demand disruption. While pricing for energy, gold (NYSE:GLD), and agriculture supplies has corrected from record highs, the fact remains we are likely to see much higher prices going forward.
One of the biggest drivers for higher commodity prices, besides global demand, is the anemic U.S. dollar. The Federal Reserve’s policies and the endless printing of fiat currency have led the greenback to this miserable fate. And while deflation may be the short-term concern, longer term hyperinflation is also a real probability.
Either way, commodities are offering some fantastic opportunities for the value investor.
One commodity that many of us need to get going in the morning is coffee. And that necessity is rapidly finding its way into the Chinese culture too. This presents a unique opportunity for investors looking to profit from coffee’s rise.
Coffee demand in China, still the fastest-growing major economy, is expanding by 20 percent a year and is expected to continue that pace going forward. And recently John Calvert, president of Starbucks Coffee International (NASDAQ:SBUX), said that the world’s largest coffee-house network was planning to triple the amount of its coffee houses in China from 450 to nearly 1,500 by 2015.
China has the potential to become the largest market outside of the U.S. for coffee as the number of middle-class consumers rises. Already, the number of coffee roasting companies in China has increased as consumer demand for coffee in Shanghai and other coastal cities skyrockets.
Chinese coffee consumption is still relatively small, but has huge upside demand potential that has never existed before.
And it’s not just growth in China …
Consumer demand in India is exploding too, driven in large part because some Indians have reduced their tea consumption. Some expensive blends of coffee are out of reach for many consumers in India. However, in many cases the more expensive Arabica beans were replaced with cheaper ones such as Robusta in order to meet demand.
Coffee Cooling, but Higher Prices Are Brewing!
Coffee prices have gone up 387 percent since early 2002, hitting all-time highs this summer. As a result, several coffee-related stocks have had stellar runs for most of 2011 but are finally beginning to cool off a bit, at least for the moment.
While coffee demand continues to grow and supplies remain tight, the opportunities for investors are very good right now …
According to the International Coffee Organization, global coffee consumption rose 2.4 percent to a record 134 million 60-kg bags in 2010, while world coffee output is forecast at 133 million 60-kg bags in 2010-2011. And that supply/demand deficit is expected to grow quickly.
Another factor contributing to the increase in coffee prices is higher input costs for growers. These input prices have remained high, which means coffee prices are set to remain high as well. Farmers are forced to increase maintenance and fertilizer use, which unfortunately will not boost production enough to match growing demand.
Hot Cup of Opportunities
The coffee market is definitely heating up. And as the emerging markets tastes change, coffee is most certainly going to be on the menu.
The rise in coffee prices and the volatile nature of the market offer vast opportunities with many ways to take advantage of this growing market.
The coffee futures and options market is actually one of the most liquid and actively traded in the world, and offers very good opportunities for investors who can handle a bit more volatility and risk. However, many traders may not want to venture into the futures and options markets but would rather invest in individual stocks and ETFs.
The good news is there are several ways for investors to take part in the growing demand for coffee. A couple of the big name coffee stocks that are likely to do very well longer term are:
Starbucks Corporation (NASDAQ:SBUX) has a market cap of about $30.5 billion and share prices have been up approximately 78.3 percent since 2010. Starbucks is the global leader in the retail coffee industry and operates in more than 50 countries.
Another much lesser known company, but a growing player is Caribou Coffee Company, Inc. (NASDAQ:CBOU) which has a much smaller presence than SBUX, but a very respectable market cap of $268.36 million. CBOU share prices have been up as much as 67.2 percent in the same year period. Besides operating Caribou Coffee coffeehouses in the U.S. and around the world, it also sells coffees through grocery stores and numerous other outlets.
Green Mountain Coffee Roasters (NASDAQ:GMCR) is another rising star in the coffee market. Green Mountain is also currently trading 20 percent below its 52-week high, making it an even more attractive entry point for investors. The stock has a market cap of $14.48 billion and has risen as much as 255 percent since 2010!
However, if individual stocks are not your cup of tea, then there are a few ETFs that investors can use too …
The iPath Dow Jones-AIG Coffee ETN (NYSE:JO) is one great way to enter the coffee arena. The index underlying JO consists of one futures contract on the commodity of coffee. There is also the PowerShares DB Agriculture fund (NYSE:DBA), which allocates nearly 14.9 percent of its asset base to coffee futures. Or the iPath DJ-UBS Agriculture TR Sub-Idx ETN (NYSE:JJA), which allocates nearly 9.44 percent of its assets to coffee futures. There is also the iPath Pure Beta Coffee ETN (NYSE:CAFE).
There are many ways to play the growing demand for coffee and all of the other vital resources a growing and hungry world will demand. Don’t be diverted by short-term corrections in commodities prices. The demand matrix for commodities is just heating up and coffee is one thing consumers will want more and more of.
Yours for resource profits,
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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