Investing in coffee: 3 great strategies to consider

Key Points

• It's a three- to four-year-long process to harvest, refine and produce coffee beans for consumption.
• You can add exposure to coffee through stocks, ETNs or futures contracts.
• Coffee prices are influenced by a number of factors, especially weather and climate.

The best part of waking up isn't Folgers in your cup — it's seeing stock futures up. But coffee is important too, as many investors start looking at charts or market news daily over a fresh hot cup of their favorite caffeinated beverage. 

Coffee can also be rewarding in more ways than one, as many coffee makers and shops are publicly traded and can be good stocks for balancing out a diversified portfolio. Want to know more about how to invest in coffee? In this article, you'll learn about investing in coffee and how the price of coffee commodities influences investors with multiple asset classes to consider.

Overview of coffee investing 

Before making a commodity investment like coffee, let's learn how that hot cup winds up on your table or desk. Many of us take coffee for granted since many businesses and companies supply it for free, or you can purchase it for less than $2 at most convenience stores. But despite how easy it is to quench your caffeine thirst, the process of going from bean to cup is intricate and relies on multiple different industries.

For starters, coffee beans aren't beans — they're seeds that often take three to four years to grow and harvest fully. If you're reading this article over a coffee right now, the process to get you that cup began years ago in South America. Coffee harvests usually occur once a year, and the harvested beans must be processed, dried and milled before exporting. Once exported, taste-tasting perfects the coffee, and the approved beans are roasted and ground up for brewing.

Getting the beans from the ground to your cup is a long and complicated journey, and coffee prices can be fickle due to the number of factors involved. That's why coffee investors must keep an eye on the commodity price and the business prospects of coffee-related stocks they own.

The rising demand for coffee investments

Will coffee demand continue to rise? The answer depends on the type of coffee industry you're talking about. Some analysts worry that we've hit peak coffee consumption and project only incremental increases worldwide over the next five years. Projections from Statista show coffee-related revenue rising only four to five percent per year through 2028.

However, supply and demand are undefeated, and one segment of the industry is seeing bigger growth opportunities - specialty coffee. Making a gourmet cup of coffee at home with a machine from Keurig Dr Pepper Inc. NASDAQ: KDP or artisan products from Peets Coffee Inc. NASDAQ: PEET has become as much of a pastime as ordering a favorite concoction from Starbucks or Dunkin. While overall coffee market growth may stall, the world is still addicted to caffeinated beverages, and it's unlikely the demand for coffee will shrink anytime soon.

Navigating the coffee market landscape

To navigate the coffee market, you must understand the commodity markets. The price of coffee beans can fluctuate wildly based on several factors, many of which are outside the producers' control (like weather conditions). Unpredictable climate events like drought or excessive heat/cold can limit coffee producers' harvests, and weak harvests limit supply. And as supply and demand dictate, fewer products means higher prices unless fewer people want a cup of coffee every morning. 

Additionally, commodities like coffee beans are grown worldwide, which means different trade agreements and regulations come into play from different sources. So it's not just the commodity's price that matters, but where a company sources its beans. Do you know where companies like Starbucks, Keurig Dr Pepper and Peet's get their beans? If not, it's an area to research before investing.

Coffee investing methods 

You'll have plenty of options if you're looking to invest in coffee-adjacent securities. Most investors know how to buy stock in publicly traded companies. But derivatives like futures and leveraged vehicles like exchange-traded notes (ETNs) aren’t for novice investors, so understand how futures or ETNs work before buying any.

Coffee stocks

The easiest way to gain coffee exposure is simply by learning how to invest in coffee stocks. Coffee stocks range from cafe chains, homebrew equipment and giant consumer staples food producers. The most prominent coffee stock on U.S. exchanges is likely Starbucks Corp. NASDAQ: SBUX, with its $118 billion market cap and 36,000 stores worldwide.

Starbucks is far from being the only popular coffee brand, though. The J.M. Smucker Company NYSE: SJM is a large-cap food company with renowned coffee brands like Folgers, Dunkin' and Cafe Bustelo. And the biggest coffee stock of all isn't even a United States company — it’s $337 billion Swiss giant Nestle S.A. OTC: NSRGY, who's responsible for the Nescafe, Nespresso and Blue Bottle Coffee brands, as well as CoffeeMate creams and sweeteners. Specialty startups like Dutch Bros Inc. NYSE: BROS seek to disrupt key players like Dunkin and Starbucks with quick drive-thru stores, cold drinks and other homemade goodies.

Coffee futures

Commodities can be bought and sold as products and as tradable securities. While buying and selling raw materials like coffee, orange juice, gold, natural gas or oil is usually left to businesses, investors can bet on the price of these commodities through futures. 

A futures contract is an agreement to purchase a particular commodity at a specified price at a certain future time. Futures usually go month-to-month, and you typically aren't required to deliver the commodity if you hold the contract until the expiration date. However, futures are complicated derivatives; you shouldn't trade them unless you fully understand what you're doing.

Coffee ETF and ETNs

Investors used to have access to more exchange-traded funds (ETFs) and notes (ETNs) with coffee themes, but most have dried up. Investors could use ETNs to invest in coffee futures without needing a futures trading account, although many of these funds used leverage and weren’t suitable for new investors. 

The iPath Series B Bloomberg Coffee Subindex Total Return ETN NYSE: JO was one such security, which tracked the price of coffee through this bond-like instrument. However, when the security matured in June 2023, JO stopped trading, and Barclays forced investors to take redemptions.

You can still gain coffee exposure through ETFs and ETNs, but the securities are more broadly focused. The Invesco DB Agriculture Fund NYSE: DBA devotes 5.5% of its holdings to coffee futures, so investors must decide if they're comfortable with exposure to sugar, cocoa, orange juice, cattle and other agricultural products.

Sustainable coffee investments

Sustainable coffee production has become a key component in the agricultural world. According to Conservation International, the land suitable for coffee farming might get cut in half over the next 30 years. As weather conditions become unpredictable, growing coffee will become not only more complex but more expensive, too.

Are there coffee companies working toward a sustainable future? Of course! Many large and small companies in the sector focus on minimizing their environmental footprint and ensuring that coffee-friendly land is available for decades. For example, Westrock Coffee Company LLC NASDAQ: WEST has a sustainability sourcing and traceability division that handles green coffee initiatives, like delivery and settlement of forward sales contracts. 

Coffee-producing regions: Investment hotspots

Coffee beans require a very particular climate to grow, and most production occurs between the Tropics of Cancer and Capricorn. Known as the coffee belt, this strip of warm farmable land includes nations in South America, Africa and Asia. Some of the world's most prominent coffee producers include:

• Brazil: Were you expecting a different country? Brazil is responsible for more than one-third of the world's coffee production, although this figure nearly exceeded 45% in 2019. However, poor weather conditions have recently limited harvests; exports fell over 35% in February 2023, the sharpest decline since 2018.
• Vietnam: Brazil's loss is Vietnam's gain as the country has surged to the #2 spot in coffee production thanks to the robusta bean. While most coffee comes from the arabica bean, Vietnam has transitioned to the more resilient robusta bean since it is sturdier and grows better in less-than-ideal conditions.
• Colombia: If you've seen a Folgers commercial, you've probably heard about the delicacy of Colombian coffee. Colombia is one of the oldest members of the Coffee Axis, having introduced the crop to local populations as far back as 1790. Today, Colombia is the third-largest coffee producer. Although limited by some producers, 2023 harvests were weak due to high fertilizer prices.

Steps to invest in coffee 

Looking to add some type of coffee exposure to your portfolio? Here are the steps to take to get started:

Step 1: Plan your coffee investment portfolio.

To be a coffee investor, you'll need a plan for adding coffee-related securities to your portfolio. Investments influenced by commodity prices always require extra consideration since coffee futures can be volatile. How long do you plan to hold your coffee investments? Is this a short-term trade or more of a long-term move? Once you know your timeline and the capital you’re putting in, you can move on to the next step.

Step 2: Decide which types of security to invest in.

What's your investment expertise level? If you're just getting started on your investment journey, you might prefer coffee stocks or consumer staples ETFs that include coffee companies. But if you have experience with derivatives or leveraged products like ETNs, you can also consider these in conjunction with equity-based investments. Never invest in a security if you're unsure how it's structured.

Step 3: Research coffee companies or funds you want to buy.

Before you invest in coffee stocks, you'll need to research the different companies and funds that fit your portfolio parameters. For example, here's Keurig Dr. Pepper Inc. NASDAQ: KDP, which counts the at-home Keurig coffee system amongst its beverage product lines.

KDP has rewarded its shareholders well over the last decade, but with plenty of volatility. What factors could influence KDP future performance? How has inflation affected the company's margins? It’s easy to tell where a company has been, but determining where it's going requires due diligence.

Step 4: Buy your assets and monitor commodity prices.

Once you've decided which securities to invest in, you must purchase them through your brokerage account. Stocks, ETFs and ETNs can be purchased through a traditional online brokerage account, but futures require a special account type. Many brokers allow equity and futures trading, but you'll still likely need specialized account permissions to invest in both on the same platform. Once you've invested, watch the price of coffee commodities, too.

Factors affecting coffee investments 

The following factors affect coffee investments:

• Commodity prices: The factor placing the most pressure on coffee investments is the price of coffee itself. Coffee spiked to a high of $2.47 in August 2022 and then cooled off to $1.50 by Thanksgiving. Volatile prices can make it difficult for public coffee companies to estimate budgets and costs.
• Inflation: All companies feel the pressure from inflation one way or another, and coffee stocks are no different. For producers, material and labor price fluctuations can cause uncertainty. For shops and cafes, inflation can influence their ability to hire workers, maintain properties and purchase goods like packaging and equipment.
• Climate: Coffee starts as an agricultural crop, and companies depend on quality weather to maximize harvests. If drought and inclement weather impact the annual harvest, commodity prices can become volatile quickly.

Pros and cons of investing in coffee 

Here are some benefits and drawbacks to consider before pouring any capital into a coffee investment:

Pros

The benefits include:

• Growing industry: The coffee industry has taken in $11 billion in total global revenue in 2023, and the market should grow by more than 3% annually through 2028.
• Variety of investment methods: Coffee investors can purchase individual company stocks, ETNs, agriculture ETFs or future contracts to gain exposure to this commodity.
• Domestic and international stocks: Investors can buy companies in the United States like Starbucks or Keurig, but also international giants like Nestle.

Cons

The downsides include the following:

• Volatile commodity prices: Like most agricultural products, coffee prices can be volatile from year to year, depending on the success of the harvests. Poor harvests result in lower supply, pushing the price and increasing costs throughout the industry.
• Climate change concerns: Since weather is a crucial factor in growing coffee beans, climate change has become a concern for coffee producers and sellers. If inclement weather becomes more constant, the industry could become very unpredictable.
• ETNs and futures aren't for beginners: If you're new to investing, leveraged products and derivatives might not be the best place to start. These instruments have complex structures and could erode your capital quickly if you don't fully grasp how they work.

Consider investing in coffee

So, what are the best tips for investing in coffee? Understand what you're buying, have clear goals and timeframes and know the risks and potential headwinds and tailwinds.

You likely know more than a few people who can't function properly without their coffee. Drinking coffee is an integral part of so many mornings, but just because a large population can't go without their caffeine fix doesn't mean coffee investments are easy money. Like any investment, coffee stocks, ETFs, funds and futures require research, planning and proper execution. If you want to make money trading securities heavily influenced by a commodity price, you must be thorough and stick to the plan once established. 

FAQs

Still looking for the ideal way to get into coffee investing? Here are a few frequently asked questions by inventors looking to add coffee-adjacent securities to their portfolios.

Is coffee a good investment?

Before you invest in coffee, you'll need to consider your timeline and investment goals. Even the best coffee stocks may not suit your investment parameters, which could result in taking on too much (or too little) risk in your portfolio.

How do you invest in coffee prices?

If you want to invest in the actual price of coffee beans, you'll need to trade coffee futures contracts on a commodities exchange. Like any other commodity, coffee prices can be volatile, and traders use futures to bet on the price in the coming weeks or months.

Is investing in coffee for beginners?

It depends on the type of security you want to invest in. Futures and ETNs are complex products that involve leverage and may not be suitable for beginners. However, beginner investors can access large-cap publicly traded coffee companies like Starbucks or Keurig Dr. Pepper, which carry risks but don’t have the complications of leveraged securities.