Pay Attention to the Price of Coffee

• Low-quality coffee gets the boot
• 44% of supply - gone overnight
• How to invest

The world's second most popular beverage (after water) is about to get a whole lot more expensive.

I'm talking about coffee.

The reason for the price increase (besides slightly higher oil prices and general currency devaluation) is pretty serious, at least in coffee circles.

You see, for many years, coffee roasters and other institutional coffee consumers have complained about the lack of consistency of quality in Arabica beans.

Part of the allure of having a large, liquid commodity exchange is that the commodity itself is fungible, that is, of the same quality and consistency - from one ear of corn to the next, from one ounce of gold minted in South Africa to one smelted in Alaska.

The problem is that coffee is not the most durable commodity. So if it sits in a warehouse in Mexico or a burlap bag in the Andes for too long, it will lose freshness, aroma, flavor, etc.

If a stale pound of coffee from Brazil costs the same as a fresh pound from Colombia, you can bet there will be problems.

So the governing body of coffee exchanges, the InterContinental Exchange (ICE) recently decided to disallow the delivery of old beans to fulfill contracts.

The Wall Street Journal reported that the certified stockpile of coffee essentially shrunk 44% overnight thanks to these new rules.

The International Coffee Organization (ICO) posts daily average prices for coffee, and you can see for yourself that average coffee prices rose 7% so far this month alone.

According to Dow Jones Newswires, “Higher prices have prompted some roasters to raise prices. Kraft Foods Inc. KFT said Wednesday that it had increased ground-coffee prices by 12% for its Maxwell House and Yuban brands. Starbucks Corp. SBUX and Farmer Bros. Co. (NYSE: FARM) announced price increases for some of their products earlier in the autumn.”

Although this supply crunch/price spike in coffee really has very little to do with my overall investment thesis, I think it's fair to say that easy money policies around the world will only serve to bolster further price increases as the supply story continues to unwind.

So how to invest?

Well, it's a little bit trickier than just buying a coffee retailer like Starbucks or Farmer Bros.

Those companies have to raise their prices just to maintain the same level of profitability. They won't necessarily see any boost to profits unless they can somehow secure cheaper supplies of coffee than their competitors.

But there is one investment traded in the United States that might warrant further research.

It's the iPath Dow Jones-UBS Coffee Subindex Total Return Exchange Traded Note JO.

The objective of this ETN (similar to an ETF) is to “reflect the returns that are potentially available through an unleveraged investment in coffee futures contracts.”

So as coffee prices rise, so should the value of the shareholder units in this ETN.

So far this year, JO has performed admirably:

It's up 45% this year.

I'm not saying you should back up the truck on this ETN, but it's worth consideration as a good way to profit from the likelihood of ever-higher coffee prices.

Keep it on your radar, do your own research and let me know your thoughts on this investment, and any other potential ways to profit from higher coffee prices.

Have a great weekend,

Kevin McElroy

Editor

Resource Prospector

full disclosure: no positions