The Poor Investor

Investigatory Value Investing

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Coffee Industry Outlook

Recently I wrote an article regarding finding investments during market peaks.  In that article I discussed some coffee stocks and made an argument for being bullish on coffee over the long-term.  However, I was unable to go into the coffee market in as much detail as I would have liked.  In this article I will attempt to fill in some of the gaps that existed regarding coffee in the last article.

Coffee prices have had a massive drop over the last year (Figure 1).  This was fueled by a few major variables.  For one, according to the Public Ledger, global coffee production is up 50% since 1993.  The simple fact of the matter is that global supply was greater than global demand.  This resulted in a surplus of 10m bags in 2013 and 5m bags in 2014.  Also, commodity prices and the dollar are inversely related to one another.  According to the Wall Street Journal, “The dollar’s rise to a near 10-year high against the Brazilian currency added to selling pressure for arabica coffee and sugar.”  Being that coffee is measured in US dollars, as the dollar rose coffee prices fell.

Drop in Coffee Prices

Figure 1

However, this does not mean that demand is falling.  In fact, in nearly every country measured, total consumption has been increasing steadily since 2003.  Asian countries are especially on the rise with plenty of room to grow in China, as its per-capita consumption of coffee remains extremely low (Figure 2).   According to the China Coffee Association Beijing, on average a person in China drinks about 5 cups of coffee a year, which is well staggeringly below the world average of 240 cups per year.  The number of coffee drinkers there is growing at a rate of about 15% a year as younger generations of Chinese are preferring coffee over tea more and more.

Per Capita Coffee Consumption Low in China

Figure 2

Developing countries are experiencing a burgeoning of the middle-class and hence spending is growing overall (Figure 3).  There is no shortage of articles linking middle-class growth to increased coffee consumption (here are a few examples: 1, 2, 3, 4, 5).  As a luxury good, as incomes rise so too does coffee consumption.  Also, people want to experience things that are new to them and the appeal of America’s “Starbucks culture” is alluring to those in other countries.  Starbucks estimates it will double its stores in EMEA, Japan, China and other non-US countries by FY19.  The US and surrounding region will grow 25%.  This will grow its current 21,000 store count to 30,000 stores.  Starbucks is banking on the trend of increased coffee consumption.  Forecasts by the Public Ledger also show global demand will outstrip global supply over the long-term by 10m bags in 2023, with supply struggling to keep up with demand as early as 2016.  Also, as the knowledge of the health benefits of coffee drinking becomes more and more widespread, so too will coffee consumption.  This is a long-term bet, not only on coffee, but on the rise of standard of living worldwide.

Burgeoning Middle Class Spending

Figure 3

While I don’t advocate trading on near-term information, things are also looking up for coffee prices near-term.  Coffee prices trade inversely to stocks of coffee (Figure 4).  World stocks of coffee will be used during 2015 to meet the demand that has not been produced.  As this supply runs low, coffee prices will rise.  It’s not a matter of “if” just a matter of “when,” as the International Coffee Council states, “this cannot be maintained indefinitely, and will put pressure on prices.”

Coffee Price Versus Stocks

Figure 4

Long-term investors in coffee, be it through an index, such as iPath Pure Beta Coffee ETN (CAFE), or individual stocks, such as Coffee Holding Co. (JVA), are likely to find success.

Disclosure: Long JVA 

Great Speech by Former PNC CEO

Jim Rohr speaks at CMU

Few Highlights:

On success:
-Showing up, working hard is a key to success
-Luck is also a big part of success
-Innovation and forward-thinking is key to any business succeeding

On banking/finance:
-Dodd-Frank has WalMart clause
-Money, virtually none is physically at banks
-“Too big to fail” or not big enough to protect itself?
-Deficit is a huge problem, the US dollar could no longer be the global currency soon

On society:
-Uses the internet the most: less than 30 and greater than 70 year-olds
-Every $1 spent on early childhood education gives society back $17-$27
-Biggest predictor of ending up in jail, 3rd grade literacy level
-Next “Pearl Harbor” will be a cyber attack

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