Sunday, September 7, 2014

Hot Coffee

by Keith Williams


  • Numerous reports indicate that major coffee growing regions are endangered by climate change, indicating likely pressure on supply.
  • Coffee drinking is a sign of “trendiness” in emerging markets (e.g. India), which have the potential for dramatic increase in demand.
  • The confluence of diminishing short and long term supply and expanding demand indicates robust times for investment in coffee in both the short and long term.

Agriculture is subject to climate change and agricultural scientists around the world have conducted all kinds of studies. In the US one needs to look no further than a June 2014 report on production of corn.

You know that a topic is warming up (pun intended) when it appears in The Huffington Post. This week there was a story on climate change and coffee.

Coffee is one of the most environmentally sensitive crops. It does not tolerate frost nor does it thrive in hot conditions. Indeed for optimum yield and quality of the most popular Arabica coffee, the temperature needs to be in the range 18-21oC (below 17oC yield decreases and above 24oC quality decreases). Since Arabica coffee is mostly grown in the tropics at altitude, even a small increase in temperature can make the arable area disappear up the mountain. Also higher temperatures encourage growth of a rust fungus which destroys the crop. As a result coffee is one of the most sensitive crops to global warming. A number of recent studies suggest dramatic reduction in coffee producing areas as a result of predicted warming, even in the short term.

So what does this mean for an investor?

In the short term this means a declining supply, indicating increasing prices. The increasing popularity of coffee as a lifestyle experience means that business is booming worldwide. This impacts on companies in the coffee business. Keurig Green Mountain (NASDAQ: GMCR) has already had a remarkable sixfold stock price increase over the past 2 years. With recent increased investment in it by Coca-Cola Co (NYSE: KO) it may well keep going. Coffee Holding (NASDAQ: JVA) is looking interesting. Or a broader investment is possible through iPath DJ-UBS Coffee Subindex (NYSEARCA: JO).

In the longer term it is worth looking at areas where new coffee production might be developed, especially in disease free areas. Australia has a tiny cool climate coffee producing area in Northern NSW, which is ripe for major investment. Look out for a significant Agricultural group which identifies this opportunity. TFC Corporation [ASX: TFC], a substantial play in Indian sandalwood plantations in Northern Australia, gives a sense of the upside of a strategic Agricultural investment in Australia. TFC market capitalisation has trebled to $A700 mill in the last 12 months, with the initial harvests of sandalwood.

So there is something for everyone in the prospects for coffee, whether it be short term in existing coffee industry companies or looking out to where the coffee production industry is going in the future.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Hot Coffee

Additional disclosure: With a degree in agriculture, a PhD in Biochemistry and experience in growing Tech companies (including ASX listing), the author (who lives in Sydney) is interested in exploring the development of a significant coffee investment in Australia.

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