For some commodities, it is possible to gain indirect exposure to the resource through an investment in companies that are engaged in its production. That is challenging, however, given the nature of the coffee industry. Most of global production comes from small, privately-owned entities or farmers—meaning that purchasing stock is impossible. There are, however, a few options. Tata Coffee Ltd. (TCO:IN) is one option, as this Indian company accounts for a significant portion of Asian coffee bean production.
Exchange-traded products offer investors an opportunity to establish exposure to coffee prices without having to worry about rolling futures exposure as expiration approaches. Moreover, coffee ETPs deliver exposure at a relatively low price point and offer impressive liquidity and transparency. For U.S. investors, the best option for coffee exposure is the iPath Dow Jones-UBSCoffee Total Return ETN (JO), which is linked to the performance of an index comprised of coffee futures. As such, investors should be aware that JO does not offer exposure to spot coffee prices, and that the slope of the futures curve will impact returns. Moreover, it should be noted that JO is an ETN, which means that investors are exposed to the credit risk of the issuing institution.
European investors may have more ETF options for coffee exposure; ETF Securities offers both leveraged and short coffee products in addition to a plain vanilla 1x ETF.
There is a well-developed and very liquid market for coffee futures; though designed to help producers hedge against price fluctuations, these contracts can be used by investors looking to add coffee to their portfolio or speculate on a short-term price fluctuation.
The Coffee C contract is the world benchmark for Arabica coffee. Futures contracts traded on the ICE price physical delivery of exchange-grade green beans, from one of 19 countries of origin in a licensed warehouse to one of several ports in the U. S. and Europe, with stated premiums/discounts for ports and growths. ICE contracts are for 37,500 pounds of beans, and contracts are listed for March, May, July, September, and December.
Coffee futures are also traded on the New York Mercantile Exchange, with prices quoted in U.S. Dollars per pound. A single contract represents 37,500 pounds of cotton with a minimum fluctuation of $0.0005 per pound. Trading is conducted in the March, May, July, September, and December cycle for the next 23 months. All contracts are subject to the rules and regulations of NYMEX.
Investing in coffee can be risky, but having some of your portfolio in tangible commodities has its benefits. Starting to invest in coffee requires that you know how and where coffee is made, understand your investment options and the associated risks and are willing to take some risks. Options for investing in coffee include stocks, futures and exchange traded funds, or ETFs. Buying stock gives you part ownership of a company, so if the company grows and is profitable, your stock will increase in value. When you buy a future, you're betting on what the coffee will sell for at a specific date and place. ETFs are collections of investments that track an industry index or commodity.
Exchange Traded Funds
Invest in ETFs for the lowest risk to your portfolio. Two different ETFs are completely invested in coffee, and these offer the least risk. If you are willing to mitigate your risk further, you can find an ETF that includes coffee and other commodities.
Invest in the Dow Jones-UBS Coffee ETN (JO) ETF if you want a basic coffee-only ETF. This fund was the first pure coffee ETF on the market and works by tracking a single coffee future each month. Because of its simplicity, and because each coffee future is only carried one month at a time, you can have greater oversight over your investment and pull it if you dislike a month's selection.
Decrease your risk and oversight by choosing instead to invest in Pure Beta Coffee ETN (CAFE). Unlike the other coffee-based ETF, this fund does not roll over each month but instead determines when to shift based on factors like contago -- a fluctuation in prices of a commodity over a period of months that is related to the storage of physical items. By shifting holdings to minimize that effect, this fund smooths out some of the nuances of the coffee market.
Purchase stock in a company or multiple companies that sell coffee. Investing in coffee roaster stocks is a relatively safe way to invest in coffee. Researching the specific companies you're interested in can help you select one or two. When you research stock, consider the company's past profitability and look for companies that are growing.
Buy stock in a company that sells coffee in addition to other products to reduce your risk. For example, the Smucker's company is known for its jams and jellies but is also the owner of Folger's coffee. By purchasing stock in a company that sells multiple products, you can spread out your risk.
Purchase the stocks yourself if you have an online brokerage account, or contact your broker to have him make recommendations and execute the stock purchases on your behalf. When using a broker you can expect to pay more in fees.
Research coffee futures before investing, and understand that coffee futures offer the highest risk of any coffee investment. They also offer the greatest potential reward. Only invest what you can afford to lose when working with coffee futures.
Decide which coffee futures to invest in. A coffee future that trades on the New York Mercantile Exchange under ticker symbol KC offers trades five times a year. You can buy a single contract, which represents 37,500 pounds of coffee. This is not a small investment.
Purchasing a contract in the Coffee C contract, which covers coffee bean deliveries from any of 19 countries to specific ports in the United States and Europe, is a more diversified way to invest in coffee futures. Like the NYME coffee futures, trading is done five times a year and each contract is for 37,500 pounds of coffee