Back in June, I told you about a nasty one-two punch that was squeezing global coffee supplies.
Namely, an ongoing drought in Brazil and a disease called “la roya” that was damaging crops.
Today, both obstacles remain. La roya continues to spread and the drought has turned to unseasonably heavy rain, which has already caused Brazilian coffee growers to downgrade their forecast for next year’s crop.
Combined, the news pushed the price of December coffee futures to a three-month high earlier this month.
So if you’re a java drinker, beware…
Emerging Markets Want Their Caffeine Fix
As Brazil’s problems cause concern about coffee supplies, demand is also rising.
And that demand is coming from the developing world, thanks to a growing middle class with increasing incomes.
Indeed, the International Coffee Organization forecasts that by 2020, emerging markets will account for 50% of global coffee consumption.
And the U.S. Department of Agriculture says that global demand will hit a record this year.
Largest Producers Turning Into Big Consumers
Interestingly, the pace of coffee consumption is twice as high as the global average in countries that are traditionally the largest exporters.
Brazil, Vietnam, and Colombia – which account for 60% of global coffee production – are seeing consumers gulp down joe like there’s no tomorrow!
Just look at Brazil, the world’s largest producer of coffee beans. By the time 2014 is over, it’s projected that Brazilians will have bought 1.03 million metric tons of packaged beans. That means Brazil will surpass the United States as the world’s top coffee-consuming nation – an honor that Americans have held for a decade and a half.
In Vietnam, the world’s No. 2 coffee-producing country, consumers are also drinking more coffee. Sales of packaged coffee there have more than doubled over the past decade. The Vietnamese have consumed over two million 60-kilogram bags.
And Colombians will buy a record 72.5 metric tons of coffee this year.
The Future for Coffee Prices Is Higher
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Inevitably, as coffee consumption increases in these countries, exports to the United States and elsewhere will decrease.
This is especially true for the higher-quality Arabica beans, as rising incomes mean tastes are becoming more refined in the emerging world.
In a battle for beans, it’s the locals who’ll win, with exports suffering.
The upshot is, coffee prices will rise. In fact, it’s already happening.
In July, Starbucks (SBUX) had to raise the price of the coffee it sells in grocery stores by roughly 8%. That’s despite the company hedging about 60% of its coffee purchases.
By next year, we may see Arabica beans selling for about $3 a pound – the highest level since 2011. And even higher prices may come in the years ahead, as coffee consumption continues to grow like wildfire in coffee-exporting countries.
You can shield yourself from this scenario by investing in the iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO). The note is designed to track the performance of the current coffee futures contract, and its yearly fee is only 0.75%.
And “the chase” continues,