Coffee has been an essential raw material, exported and consumed worldwide, significantly impacting the GDP of many economies. With growth over the years, coffee has become part of the list of raw materials traded through futures contracts on the stock exchange.
Before we learn how to invest, it is essential to discuss the importance of the coffee market, how it works, and the leading coffee producers, among others.
Discover the coffee market
Coffee is one of the most popular and consumed drinks in the world. Its unmistakable aroma and flavour have made it an essential element in the daily lives of millions of people. However, behind each cup of coffee is a complex market involving producers, consumers and various factors that affect its price.
Types of coffee: Arabica and Robusta
Two main varieties of coffee dominate the market: Arabica and Robusta.
- Arabica coffee: This variety is the most popular and represents approximately 60 – 70% of world coffee production. Arabica is known for its smooth and balanced flavour, with a more delicate aroma and less caffeine than Robusta.
- Robusta coffee represents around 30 – 40% of world production. Robusta has a more pungent and bitter taste with a higher caffeine content. It is commonly used in coffee blends and the production of instant coffee.
Largest producers and consumers of coffee
According to the US Department of Agriculture and coffee production and consumption monograph, Brazil, Vietnam, and Colombia are the central coffee-producing countries in the world. Brazil registered a volume of 62.6 million 60-kilogram bags in 2022, according to the graph below.
With some exceptions, world production of coffee increased in the last two decades to over 172 million bags at the end of the 2022/2023 season. Investors generate most of this amount in a single region, South America. South American countries are responsible for over half of the volume produced last season.
The major coffee consumers are
- United States: The United States is known as the highest coffee-consuming country in the world. The coffee culture is robust in the United States, with numerous cafés and chains like Starbucks, which have popularised the drink.
- European Union: Europe is also a major coffee consumer, with countries like Germany, Italy and France leading the consumption chart.
- Japan: coffee has gained popularity in Japan over the last decades, becoming the favourite drink of many Japanese.
Factors influencing the price of coffee?
Before investing in coffee, it is essential to understand the variables that affect the price of coffee and the current market trends. Here, we will discuss the main variables to consider.
- Supply and Demand: The price of coffee also conforms with the basic law of demand and supply. If there is a limited supply of coffee, the price will increase. On the other hand, if the supply is high and the demand is low, the price of coffee will decrease. Therefore, holding coffee during a period of large supply with other factors may be profitable.
- Weather Conditions: The coffee crop is sensitive to weather conditions and has its requirements for optimum production. Weather conditions such as drought, frost, and other natural disasters affect the supply of coffee. They reduce coffee production and ultimately cause a significant rise in the price of coffee due to scarcity.
- Government Policies: Government policies act as a regulatory system for the import and export of coffee. Policies such as tariffs, subsidies, and import and export taxes may have a significant impact on the price of coffee.
- Consumption Trends: Consumption trends also influence the price of coffee. If demand for speciality coffees increases, the price of high-quality coffee will also increase.
- Exchange Rates: As an internationally traded agricultural commodity, coffee depends on the exchange rate to determine its value in the global market. If the currency of a coffee-producing company becomes stronger, the cost of purchase, import and export will increase, impacting its global price.
As for current trends in the coffee market, there are several factors to consider:
- Sustainability: Consumers are increasingly interested in the sustainability and traceability of their coffee. Coffee producers are adopting more sustainable and transparent practices to respond to this demand.
- Digitalisation: Digitalisation is also transforming the coffee market. E-commerce platforms and mobile apps are making it easier to access coffee products worldwide.
- Innovation: Innovation is also driving the coffee market. New extraction and preparation methods are gaining popularity, and producers are experimenting with increasingly exotic coffee varieties.
How to invest in the coffee market
You can invest in coffee using different financial instruments, including buying companies’ stocks, ETFs, or Futures through a financial broker. After selecting your investment instrument, you need to choose a financial broker to use to access the market. The following are the types of coffee investment:
1. Shares in coffee companies
Buying shares in coffee companies is one of the best ways to invest in coffee. This involves buying a particular percentage of a company dedicated to cultivating, producing and selling coffee. By investing in the shares of these companies, you are betting on their success and growth in the market. Some of these companies include:
- Coffee-producing companies: including brands such as Starbucks, Lavazza or Juan Valdez.
- Coffee Processing and distribution companies: Companies such as Nestlé, JDE Peet’s or illycaffè are some of the leading coffee processors and distributors worldwide.
- Cafeterias and retail businesses: In addition to the large coffee chains, you can invest in smaller coffee retail businesses online and in physical stores.
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2. Futures and options
Future contracts are agreements to buy or sell coffee at a future date at a specific price. This option can be more risky, as the price of coffee can fluctuate significantly.
Futures contracts are traded on stock exchanges, protecting coffee producers and buyers from market volatility. You can trade your coffee futures and options contract on the UK’s London stock exchange.
Options give the buyer the right, but not the obligation, to buy or sell coffee at a specific price at a future date. Therefore, if the price is unfavourable, you may decide not to buy again.
3. Coffee investment funds and Exchange Traded Funds
Another option is to invest in funds that include coffee companies in their portfolio. This way, you will diversify your investment and reduce risk. For example, iPath Dow Jones-AIG Coffee Total Return ETN is an investment fund that tracks the performance of coffee prices.
By investing in this fund, you will invest in various companies in the coffee supply chain.
- Corporate Investment Funds: these funds invest in stocks of coffee-related companies.
- Commodity Investment Funds: These funds invest directly in the commodity, i.e. coffee as a product.
How to invest in coffee on ActivTrades
With ActivTrades, you can trade the coffee industries as Contracts for Differences (CFDs) or Spread bets.
Investing in the coffee industry with ActivTrades is simple and straightforward, as all the process is online. All you need is to provide your official details to register with the broker, and then you can proceed to the market.
Here are steps to start investing in the coffee market through the Activtrade Broker.
Step 1: Open An ActivTrades Account
Signing up for an ActivTrade account typically takes 15 minutes, and it may take up to 24 hours for account verification. Follow the steps below to register a trading account.
- Go to the ActivTrades website and click ‘Register Now’ at the top right corner.
- Fill in the required information, including your country, name, and email. Then, create a password.
- Complete the registration by filling out the ‘Personal Details‘ and ‘Residential Details’ forms.
- Fill in the questionnaire regarding your financial experience and risk appetite.
- Configure your account by choosing the platform (ActivTrader, MetaTrader 4, or Metatrader 5) and choose your base currency.
- Verify your identity per current Know-Your-Customer requirements (provide your ID and proof of address).
Note: You should choose an ActivTrade account (Individual or Professional account) according to your trading and investing experience.
Step 2: Fund your Account
Once your account is verified, you can fund the account to start trading. ActivTrades offers several payment options, such as credit/debit cards, bank transfers, or electronic wallets like Neteller, Paypal, Skrill, etc.
ActiveTrades does not have any minimum deposit amount. All Deposit to your ActivTrade account is free except with card deposit. ActivTrades charges a 0.5% fee on every deposit. Also, with any funding method, the funds should appear in your ActivTrades account in at most 30 30-minute waiting time.
All withdrawals from ActivTrades are free, irrespective of the methods.
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Step 3: Look for the asset you are interested in
Depending on the trading platform you’re using to trade your ActivTrader account, navigate the platform to the commodities section and find coffee. You can also search for the commodity to view its chart and decide your investment plan.
Step 4: Analyze the Commodity
Once you find the commodity, you can analyse the market to make financial decisions. ActivTrades, through its trading platforms, offers fundamental and technical analysis tools to help make the best investment decision. When you click on the asset, you will see the market trend as a line, graph, or candlestick in different timeframes, depending on the trading platform.
Now, you can trade coffee as CFDs or spread bets on ActivTrades from the trading platforms.
Why invest in coffee?
For many people, investing in a raw material like coffee can be a way to expose themselves to medium-term trends or simply to adjust market expectations. There are also other reasons to do this:
- Diversify the portfolio: Adding coffee or some other raw material can be a great choice to diversify your portfolio. In addition, having a more robust portfolio is a great strategy when other assets are performing worse.
- Hedge against inflation: The price of many raw agricultural materials, such as coffee, rises when inflation rises. Inflation occurs for many reasons, such as monetary stimulus from central banks, but ultimately results in a loss of purchasing power and an increased cost of living.
- Global demand: Coffee is widely used around the world. Due to the gradual development of emerging countries, the demand for coffee is expected to increase due to its use.
- Currency speculation: Many products are quoted in US dollars, which is the case with coffee. In addition, a dollar depreciation will facilitate the importation of coffee beans worldwide.
Advantages and disadvantages of investing in coffee
Here are some advantages and disadvantages of investing in coffee:
✅ Growing global market
✅ Potential profitability
✅ Constant demand
❌ Risk of price fluctuations
❌ Risk of harvest
❌ Requires specialised knowledge
In summary, investing in coffee has advantages such as constant demand, potential returns and portfolio diversification, but disadvantages such as price, harvest, and investment risk. As an investor, it is crucial to carefully weigh these advantages and disadvantages before making any investment decision. And, of course, always remember to invest responsibly.
FAQs About Coffee Investment
Is Coffee a Good Investment?
Investing in coffee as a stock, ETF, or future is worth the risk. Still, like every other investment, you must consider your risk appetite and timeline before making such decisions. This is because, like every other commodity, the coffee market is volatile, and traders often invest as futures to speculate its price for the coming weeks or months.
How to Invest in Coffee?
Firstly, you must decide which investment instrument to use in the coffee market (stock, ETF, or Futures). Then, you can choose a broker to access the coffee financial market. With the broker, you can invest in shares of a coffee company or trade coffee as CFDs or spread bets. ActivTrades broker gives you access to the coffee market.
Why Invest in the Coffee Market?
The coffee market is currently worth more than $100 billion in a year, with a steady increase in demand for the commodity. While the volatility and risk of the market are present, investors have a high prospect in the market, which is the foundation of their interest.