In the last part of this series I will look at the final piece of the puzzle of whether to buy Coffee or Starbucks by talking about the Coffee ETF (COFF).
We can see from the chart below that coffee has dropped off fairly sharply from the recent highs but seems to be forming a base around the 320 mark :
The stock to use ratio of coffee has been pretty low compared to where it has been in the last two decades this would indicate that we should be seeing prices being supported at least and probably moving higher.Coffee is being increasingly drunk throughout the world and the rising affluence of the emerging markets middle classes is likely to see an increase in their coffee consumption as the big chains start to open franchises and people look to emulate what they see in coffee drinking as a sign of western affluence.
In one of the biggest emerging markets I.e. China, the consumption of coffee is on the rise .It’s been estimated that China’s coffee consumption was approximately 45,000 tons in 2006. But that number could jump five-fold or even six-fold to reach 300,000 tons annually in the next 10 years. China's coffee consumption is growing at rate of 10% to 15% each year. And with a population of 1.3 billion, it won’t be long before China becomes the No. 2 coffee consumer in the world.
I believe that the medium term outlook for coffee is very positive, it is however very volatile and reacts violently to changes in weather, for that reason I would steer away from the Futures market, however the ETF is not leveraged so will allow you to stay in for the long term and not worry too much about volatility.
I would like to see it building a bit of a base here then moving higher and I would be buying with a longer term view for my Pension. I would likely leg in to the position a third at a time and place a 25% stop loss.
So to answer the question, would I buy coffee or Starbucks ? For me personally where there is an option to buy into the commodity I would always favour the commodity as it is less susceptible to other forces beyond supply and demand Stocks can still suffer due to poor management or with the market in general, this is less likely with the commodity so I will be buying Coffee and not Starbucks.
I like coffee for the longer term and will buy the ETF when I see the price moving back up again from here.
I would be interested in your views: Coffee or Starbucks ?