A looming supply shock could cause near term pain for coffee companies — but one company is well positioned to weather the storm with an affordable alternative that’s in high demand right now…
Talk about a commodity that stands up well against pretty much anything that goes on in our weird and wonderful world…
Coffee for many people is a daily elixir – a stimulating potion that balances body with flavor, aroma, and acidity.
Whether there’s war, recession, economic volatility or annoying price hikes at the local Starbucks…demand seldom wanes – coffee lovers simply can’t live without their cup of Joe.
It’s estimated that over 2.25 billion cups of coffee are consumed around the world every single day.
And it’s for this reason that coffee has consistently been an attractive vehicle for commodity investors.
Where the coffee market gets really interesting is when the forces of nature intervene.
You see, unlike commodities such as minerals or oil, production for coffee depends greatly on weather. Weather determines whether a harvest is abundant or a bust.
With the proper combination of climate, moisture, sunshine, and shade, coffee plants will produce a rich abundance of “cherries” from which farmers can then extract the coveted coffee beans from to be processed for eventual sale.
When there’s a healthy harvest, the high yield usually translates to lower prices for the end-consumer.
However, when a harvest takes a turn for the worst, especially in major producing regions, global coffee prices can easily soar through the roof.
Back in 2011, severe drought, flooding and other weather events decimated crops around the world and sent coffee prices soaring 40% from the year before.
Since then, coffee farmers have enjoyed relatively healthy harvests, resulting in a steady price decline.
But this year, Indonesia, the world’s third largest producer of robusta coffee beans, is experiencing torrential rainfall. In fact, as much as twice the 30-year average has fallen since April according to MDA Weather Services.
Robusta Supplies Not So “Robust”
Dutch investment firm Nedcoffee reports that deliveries of beans from Indonesia are down about 16 percent in the five months ending August 2nd.
Robusta is widely considered the cheaper and lower quality bean compared to the more coveted arabica. As such, arabica beans are most often found in retail coffee shops such as Starbucks and sold as whole beans while robusta beans tend to be packaged into instant coffees and other quick-serve methods.
It’s predicted that robusta inventories certified by NYSE Liffe could fall 34% to 52,000 metric tons by year end – the lowest level since May 2000.
In turn, Bloomberg traders are predicting that robusta coffee futures will gain 13 percent to $2,000 a ton during that span.
Adding to the upward pressure is second-ranked Vietnam who isn’t expected to ship their next robusta harvest for another three months.
Now that robusta prices are expected to pick up momentum in the coming months, what is the best stock to take advantage of Indonesia’s woes?
In the next 3 to 6 months, coffee companies with greater exposure to the arabica bean won’t be seeing their margins squeezed like they will with declining robusta supplies.
Brazil, the world’s largest producer of arabica beans, has seen record production over the last two years, translating into a supply glut that’s kept arabica futures down.
Last year’s harvest in Brazil reached 50.8 million bags while this year is expected to hit 48.6 million, according to the International Coffee Organization.
Best Stock to Buy Today:
With a higher-quality yet affordable alternative in arabica beans, investors may want to consider a company such as Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) who offers exclusively arabica beans in their products.
Founded in 1981, Green Mountain Coffee is a specialty coffee maker who took the world by storm in the 2000’s when it introduced the Keurig Single Cup brewing system into households around the world.
K-cups have become all the rage, with tens of millions of people now paying per cup of coffee that they brew in their own homes.
And the success of K-cups has not lost steam despite a couple of GMCR’s patents expiring late last year which is opening up the doors to more competition.
In fact, it’s fresh off its fifth earnings beat in a row and hit a new 52-week high after NASDAQ announced that the company joined the prestigious NASDAQ-100 market gauge on August 22nd.
Even after Starbucks announced its own single-brew cup and machine system, Verismo last fall, neither GMCR nor Keurig were fazed. Ironically, Starbucks has expanded on its existing partnership with the K-Cup system rather than going full tilt on Verismo.
Increased business from the coffee goliath is only going to mean one thing: more GMCR coffee being sold.
What’s more, GMCR knows that they can’t stand idly by while more competitors come into the fold. That’s why they aren’t content with just their coffee offerings even though their lineup currently boasts some 32 brands and 200 varieties of coffee.
During the Company’s summer quarterly earnings call, they explained that they intend to pursue opportunities in other products including juices, carbonated beverages, sports drinks and enhanced waters.
Needless to say, the doors are wide open for GMCR as they look poised to close out the year on a very profitable note.