How to invest in coffee

Find out how you can invest in one of the world's most traded commodities.

Updated

All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Capital is at risk.
After crude oil, coffee is the second most traded commodity in the world. It’s integrated into our daily routines, is a staple on our high streets and global demand has increased considerably in recent years.

Coffee can be complex, nuanced and volatile so it’s important to do your research, be knowledgeable about how and where coffee is made and understand the risks.

The rest of this guide explains how to smartly invest in coffee, and maximise your returns.

3 ways to invest in coffee

There are three main ways to invest in coffee. Each method comes with a different level of risk, so it’s important to do your research and choose the method best suited to you before investing in the commodity.

1. Buy coffee ETFs

Exchange Traded Funds (ETFs) are a type on investment made up of a collection of commodities, equities, bonds, or currencies, allowing for diversification across an entire industry by tracking its overall success. Take a look at our ETF guide here.

Commodity-based coffee ETFs operate with an arbitrage mechanism designed to allow investors to directly track the performance of the coffee market as a whole.

Currently, there are two Exchange Traded Funds available that are exclusively invested in coffee: iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO) and the iPath Pure Beta Coffee ETN (CAFE).

Pros

  • ETFs provide instant diversification across the coffee industry as a whole.
  • Investments come at a low price, with lower risk than stocks in a single company.
  • A single transaction adds an entire market to a portfolio.
  • A simple, low maintenance, way to invest.
Cons

  • The collection is decided for you, meaning you relinquish some of your control.
  • Though diverse, ETFs are not immune to volatility.

2. Buy shares in coffee companies

Another option for investing in the coffee industry would be to purchase stock in a company who sell the commodity or who are involved in the production process. Industry leaders include Starbucks (SBUX), Dunkin’ Brands (DNKN), and J.M. Smucker’s (SJM). It can be a good idea to invest in more than one company which would be a safer option than having all your eggs in one basket.

A way to reduce your risk even further would be to purchase stock in a company that sells coffee in addition to other products, such as Nestle, Kraft or Procter and Gamble.

Stock shares are a simple way to access the market because they can be purchased with an online broker or financial advisor.

Pros

  • You can build and tailor your own portfolio.
  • Investing is simple and accessible.
Cons

  • Stocks are volatile, factors out of our control can impact prices, making them unpredictable.
  • The risk of losing your investment is higher.

3. Purchase coffee futures

Futures are one of the most direct ways to trade a commodity. When you purchase a future, you are buying a contract to purchase a commodity, in this case coffee, at a future date at a specified price.

Investing in coffee futures essentially means betting on what the coffee will sell for at a specific date and place. The Coffee C contract offers trades five times a year and covers coffee bean deliveries from 19 countries. Each contract is for 37,000 pounds of coffee, so not a small investment.

Futures can be extremely volatile and are far riskier than the other investment options. They also offer the greatest potential return, however, you have to get the timing and price movement right to see a profit on your investment.

Pros

  • Because of the lot size, small moves in the script, such as 1% can mean good gains.
  • Investing is simple and accessible.
Cons

  • Futures are volatile investments. No one can predict with any degree of certainty how the pice of coffee will fluctuate.
  • The risk of losing your investment is high, small moves against you can mean big losses.
  • Futures expire. Failure to exercise them prior to expiry makes them worthless.

What are the risks?

The price of coffee can fluctuate depending on a range of factors, many of which are out of our control, making the commodity volatile and unpredictable. These factors include:

  • Weather conditions in the countries producing the coffee.
  • Economic and political factors impacting coffee-producing countries.
  • Fluctuations in foreign currency exchange rates.
  • Changing trade regulations and restrictions.
  • Changes in the supply and demand of coffee.

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