Your daily cup of coffee definitely has a whole lot more going for it than providing that early morning pick me up. World’s third most popular beverage, after tea and water (yay for our tea lovers!), and second most traded commodity after crude oil, coffee is a significant and pervasive economic driver. Surprisingly only a few know how much this crop wields. Should you lose sleep wondering if your favorite beans are going to disappear in the future? Not yet. Although, we do need you to grab a cup of your favorite brew while we explain just how important the coffee industry is to the world’s economy.

The last decade witnessed the value of the global coffee industry rocket. It almost doubled to a whopping $90 billion [3]. A recent study showed that more than 2 billion cups of coffee are consumed everyday worldwide [4] and the coffee market is expected to grow at an average rate of 5.32% between 2020 and 2024 [5]. The demand for coffee today is mostly driven by the younger generations who are more than willing to spend a few extra bucks on unique and premium coffee experiences. With the global demand for coffee increasing at a rapid pace as more and more consumers show a thirst for coffee craftsmanship, you must be of the opinion that it would be an ideal time for the coffee farmers. But it’s not! The entire communities around the world with their rich histories are very much struggling. 

The coffee crisis

Coffee may be the constant of some of our lives, but its industry as a whole is often deeply in troubled waters. As much as 20 million small farmers across the tropics, from Mexico and South America to Africa, India, and Vietnam, heavily rely on their coffee harvest to survive. They’ve known crises for 30 long years and still scientists believe a global coffee crisis is imminent. Forces are combining to create a crisis that even higher prices alone won’t fix. 

The year 2019 was declared another economic coffee crisis. World’s number 1 coffee producer, Brazil over supplied coffee to such an extent that market prices went below the minimum prices that a farmer needs to break even. According to BBC [1], by May 2019, coffee prices reached their lowest in over a decade at $0.88 per pound.  While our fancy lattes and cappuccinos cost us a good few bucks, farmers on the other hand suffer a great deal due to the market fluctuations.  As much as 60% of coffee farmers in Guatemala, Nicaragua, El Salvador and Mexico reported food insecurity during the harvest cycle in the previous decade, according to a paper published by the Specialty Coffee Association of America.[2]

Owing to decades of instability and economic shocks, the production of coffee fell from 15000 tons in the late 1980s to just 500 in 2017 in Zimbabwe.[7] In addition to the collapse of the country’s national economy, they also  witnessed knock-on effect of low yields of high quality coffee, leading to limited economic returns for farmers.

On top of the ups and downs that the market forces cause, climate change is threatening the existence of the very plant where our all-important daily brew begins. Coffee, a very high-maintenance plant, thrives in a very narrow temperature window- too cold and the berries will freeze, if it’s too hot, the berries don’t grow properly. Farms in Indonesia and other coffee-producing countries tend to sit at a particular elevation where the ideal temperature range can be sustained. But the temperatures are changing around the globe rapidly. Temperatures in Colombia’s coffee region have risen more than 2 degrees Fahrenheit since 1980. Climate change has also made rainfall patterns less predictable and caused favorable conditions for coffee rust, a fungus that can devastate an entire crop. To top it all, experts predict climate change could cut the land suitable for Arabica coffee production in half by 2050 [6], eradicating both coffee and livelihoods and causing havoc down there.

Trade and economy

With the boom in demand for coffee in the last decade, it has surely become one of the most volatile investment tools to trade. While some use coffee futures and options to hedge their portfolio, others speculate. As the global consumption of the bean continues to grow steadily, many artisanal coffee shops are rapidly cementing their place in modern society’s retail business. As an important dietary staple, this agricultural commodity has spawned a large economy of its own. One of the largest importers of coffee, the United States of America alone is economically impacted by coffee by more than $225 billion, which is approximately 1.6% of the country’s GDP. The coffee industry in America alone employs more than 1.7 million people. And that’s just one country! Imagine the numbers for other larger importers of coffee like the European Union, Japan, South Korea and Canada amongst others. By now even you would agree, coffee commodity prices play a very important role in our economies. 

When choosing to trade this commodity, it is important for investors to decide on the coffee bean type. The two popular varieties are Arabica and Robusta. Arabica coffee accounts for more than 70% of the coffee in our markets and is typically the more expensive to purchase, out of the two. While these beans are of higher quality having a smooth and lighter taste, Robusta beans are stronger bitter due to their higher caffeine content. Due to its high caffeine composition, Robusta beans are more in demand and usually trade at higher prices. Both these coffee beans are traded as options and futures contracts on New York, Singapore and London stock exchanges amongst others.  

One of the easiest ways to trade coffee is with CFDs. A contract for difference is a contract between a trader and broker in order to try and profit from the price from the price difference between opening and closing trade prices. The buyers are liquid when they purchase CFDs as they are not tied to any asset. They have just purchased the underlying contract. It saves the investors from the inconvenience of buying and owning the commodity physically. In addition, CFDs give the opportunity to trade coffee in both directions. Regardless of having a positive or negative view of the coffee market forecasts and predictions, investors can try to profit from both upward and downward future price movement.

So is coffee a good investment? For starters, just like any other asset, trading coffee gives no guarantee of higher returns. Nevertheless, for years, this agricultural commodity has attracted attention from international investors and traders who wish to add substantial growth and diversification to their portfolios. Coffee as an investment allows investors to diversify their portfolios. In an equity only portfolio, investors are able to lower the volatility due to the absence of correlation between this commodity and other asset classes. It also serves as a safe haven in times when markets are turbulent, thereby providing protection against inflation and declining currencies.  

The way forward

Not every investor is comfortable with commodities markets, but there’s no denying that coffee futures are here to stay. We believe it holds potential in great abundance. But we need to spare a thought about those who grow the bean which we trade and make profits. While major changes to infrastructure or more than a decade long-established practices are never easy or straightforward, investment to revive coffee industries can help struggling regions to not only face today’s challenges, but also be prepared for the future and grow. Collectively, we can and should help vulnerable communities to unlock the enormous potential of coffee – restoring local economies and sustainable livelihoods, while preserving the future of some of the world’s rarest blends

 

References-

[1]  https://www.bbc.com/news/world-us-canada-48631129

[2] https://scaa.org/PDF/SCAA-whitepaper-blueprint-end-hunger-coffeelands.pdf

[3] https://www.ft.com/content/5009be96-7569-11e9-be7d-6d846537acab

[4] https://www.britishcoffeeassociation.org/coffee-in-the-uk/coffee-facts

[5] https://www.britishcoffeeassociation.org/coffee-in-the-uk/coffee-facts

[6] https://www.independent.co.uk/life-style/food-and-drink/coffee-rare-luxury-peruvian-farmers-climate-change-fairtrade-leaf-rust-disease-a9127266.html

[7] https://www.telegraph.co.uk/business/2019/05/08/coffee-key-perking-zimbabwes-battered-economy/

Read other articles in this series:

  1. The Hidden Economics In Fashion
  2. The Economics of Food Technology

 

 

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