Lately, the price of eggs has dominated conversations, making headlines in the news, influencing market trends, and even playing a role in election outcomes.
But for those who follow commodities markets, the real story right now is in coffee.
Over the past two years, coffee bean prices have surged to levels we haven’t seen in decades.
How big is this surge??
- The forward contract of Arabica coffee traded at the ICE exchange almost tripled since 2021.
- In 2024 alone, prices rose more than 80%.
- Most noticeably, retail prices per pound in the US have increased by 27% between 2021 and 2024.
Today we explore the fundamental drivers behind this rally, examine its impact on the coffee industry and consumers but also explore tangential investment opportunities in the coffee sector for retail investors.
To find out more, we asked Lukas Kuemmerle, our resident commodities expert who writes an insightful and technical Substack called The Commodity Report.
Lukas Kuemmerle is a commodity researcher, editor & trader from Germany. He is the founder of analytics firm Kuemmerle Research. This is his second guest issue for Alts.
Table of Contents
A quick recap on commodities
Before we get into coffee, it’s important to understand the most actively traded commodity markets:
- 🛢️ Crude Oil: Critical to the global economy. Huge daily trading volume (through futures and contracts).
- 🥇 Gold: Love it or hate it, it’s perceived as a hedge against inflation and economic uncertainty.
- 🌾 Agriculture: Crops like wheat, corn, and soybeans are essential to global food production & trade. (Coffee is included here.)
- 🐄 Livestock: Last year, beef prices flirted with record highs because American cattle herds were at historical lows.
- ⛏️ Metals: Important as a store of value and for industrial applications. Includes silver, copper and rare earths.
How do people invest in commodities?
Commodities often have a low correlation with mainstream asset classes. It’s a hedge against market downturns, inflation and geopolitical risk (which you may have noticed is…especially high these days.)
While physically owning commodities gives the most direct exposure, it also has a bunch of problems around storage and logistics (commodities often have limited shelf lives!)
My company (Kucrop Analytics) does not cover physical commodity exposure.
Instead, investors like me typically access commodities through futures. Futures trading allows you to hedge against volatility and speculate on future price movements.
What caused coffee prices to spike?
There are a few fundamental drivers behind this surge. Let’s break ’em down.
Climate change
The majority of the world’s coffee is grown in the “coffee belt,” a region near the equator that spans between the Tropic of Capricorn and the Tropic of Cancer.
Within this zone, the top 10 coffee-producing countries account for nearly 90% of global coffee supply.
Brazil and Vietnam alone account for roughly 55% of total coffee bean production worldwide.
Climate change has led to an increase in extreme weather events, adversely affecting these lucrative coffee-producing regions.
In Brazil (the world’s largest coffee producer) severe droughts and unexpected frosts have damaged crops, leading to significant supply shortages.
Similarly, Vietnam, a major producer of robusta beans, has faced drought conditions followed by unusual high amounts of heavy rains, disrupting production.
These climatic challenges have reduced the availability of coffee beans, contributing to the price surge.
Rising demand from Asia
This has coincided with rising global coffee consumption, especially in emerging markets across Asia.
China, for instance, has seen a 15% growth in coffee consumption over the past year, with the number of coffee shops expanding rapidly.
At the same time, global coffee production is projected to experience negative production growth, leading to a tightening supply-demand balance.
The coffee production situation remains volatile and uncertain. Just recently, the USDA revised its estimates for production and ending stocks for Brazil.
Moreover the CONAB forecasted that that Arabica coffee production in Brazil will decline by 12.4% YoY for the 2025/26 season.
What impact is this having on industry prices?
Producers
While modestly higher coffee bean prices can benefit producers, right now many producers are struggling with increased production costs which make it difficult to fully capitalize on higher prices
- Climate adaptation measures in countries like Brazil and Vietnam can be costly. These include planting resistant crop varieties, pruning and shade management, and efficient water use.
- Rising costs of fertilizers, labor, and transportation have further eroded profit margins for farmers. (This is mainly due to normal inflation. But it still hurts!)
Roasters and retailers
The strong price surge in coffee beans also provides major headwinds for roasters and retailers.
Companies like Starbucks and Dunkin‘ have faced higher input costs, leading to increased prices for consumers. Right now, these companies are just passing these costs along to consumers as much as they can. It’s the new “standard behavior,” and it’s mostly working.
However, not every company is able to push through higher input costs to the consumer without experiencing some degree of demand destruction.
If they cannot pass costs along, they have a few options:
- Eat the costs, which means margins will shrink.
- Adjust portion sizes or packaging to mitigate the impact (i.e., “shrinkflation”)
For consumers, who are at the end of the coffee supply chain, this has translated into sharply higher prices for a cup of coffee in the morning.
Whether purchased from a coffee shop or brewed at home, the rising costs of beans (but also milk and labor costs) have pushed retail coffee prices to record levels.
Now, many consumers consider coffee an essential daily commodity. So it can be argued that the supply-demand dynamics of coffee are relatively inelastic.
But there is still a threshold at which price hikes may start to impact consumer behavior…and criminal behavior.
Coffee thefts have surged in the US as bean prices hit record highs, with gangs posing as transport companies to steal truckloads worth $180,000 each.
Coffee futures ≠ retail prices
The good news is that the astronomical high price increases we see in futures pricing will mostly not be reflected in consumer prices.
Why? Because the futures market is simply a hedging instrument for commercial players.
Most major coffee chains and roasters purchase coffee through long-term contracts and use futures markets to hedge against price volatility.
This means that short-term spikes in coffee futures may not immediately impact retail prices.
However, if high prices persist for an extended period, businesses may adjust consumer prices accordingly.
How to trade the coffee situation
The first thing to know is that investing in publicly traded coffee-chains that sell coffee (Starbucks, Dutch Bros, even Luckin Coffee) is not the right option when it comes to participating from increasing coffee prices.
These companies’ share prices are far more driven by other fundamental factors than the price of the input cost coffee beans itself.
The coffee futures market has provided us with a unique situation for almost two years now.
While speculative long positioning is very crowded, commercial players currently have a near-record net short position in the market! And as the market is oversold on virtually all metrics, futures prices continue to rise…
Remember, “commericals” in the market are usually companies like coffee roasters that want to hedge their coffee price exposure to have a clearer input cost structure, speculators are most of the time hedge funds that implement trend following strategies that bet on a clear trend direction. Currently many of them are betting that prices will continue to rise.
So in the market right now, there seem to be two camps:
- One camp says prices will continue to rise due to fundamental mismatch between supply and demand.
- The other camp that says prices have risen so much that the coffee price bubble will have to burst sooner than later.
The second opinion is a difficult one in commodity markets in general.
The coffee forward curve remains in a broad and deep backwardation formation.
In those market-phases it is the death of many inexperienced market speculators to look for tops, for the bubble to burst, or for a bearish trend reversal.
But trends tend to last longer than the human brain can anticipate.
You know the saying, “markets can stay longer irrational than you can stay liquid?”
Well, this is especially true in commodity markets.
We like to separate commodity markets into different regimes and use (in 90% of the cases) a trend-following-strategy, similar to what some hedge funds do but with some additional twists.
That means that we try to use weaker phases in the still strongly backward-dated coffee futures market to implement long positions with tight stop losses.
However if futures spreads signal major disruptions and a trend change, we will also be interested in fading the price surge (about 10% of our trades).
We developed algorithms and systems that track these spreads, but we haven’t seen a loss of momentum in futures spreads since the fourth quarter of 2023.
Products for investors
Investors looking to capitalize on the coffee market dynamics have probably only one real option if they don’t want or can’t access commodity futures directly — and that’s in the form of an Exchange Traded Commodity (ETC) which offers direct exposure to coffee futures, like WisdomTree Coffee (COFF).
The important thing for interested investors to know is that these products are quite illiquid. Having larger spreads, when getting into or out of such products can be sometimes tricky, especially when market volatility increases.
Matcha: A coffee alternative? 🍵
While coffee prices are rising, consumers looking out for alternatives. Especially younger generations started to prefer matcha over coffee – driven by the trend to healthier and trendier coffee alternatives that also draw more attention on social media.
Accordingly, the matcha market is experiencing significant growth. In 2024, the market was valued at approximately USD 3.63 billion and is projected to reach USD 8.67 billion by 2031, growing at a compound annual growth rate of 11%.
In fact, this global matcha boom Is driving a shortage in Japan.
However, balancing supply with the escalating demand remains a critical challenge for the industry at the moment as well. The surge in demand has led to rapid depletion of matcha stocks, with producers experiencing unprecedented sales, exhausting inventories months ahead of schedule.
Contrary to the image of large farms and factories harvesting, grinding, and packaging matcha, most Japanese matcha farms are small family-owned operations. Instead of relying on industrial machinery, these farmers prefer traditional production methods.
As different as the tastes of the two drinks are, they have one thing in common — long-lasting supply problems.
Closing thoughts
There’s always a bull market out there.
We continue to look out for buying opportunities in the coffee market.
- Our last long trade in coffee lasted between Jan 21 and Feb 20.
- In this period the market gained, at its peak, roughly 30%.
- Currently the price action is consolidating and we’re waiting for new entry opportunities to appear according to our framework and strategy.
But to make money in commodities, it’s important to understand that it’s highly cyclical. The price action and fundamental drivers aren’t comparable with equities or crypto.
Buy and hold strategies do not work in this environment!
Only well-timed ideas over a medium holding period do. 🫘
That’s it for today!
Come find me in the Alts community.
Disclosures
- This issue contains affiliate links to TradingView. If you sign up, we get a few bucks.
- This issue was written by Lukas Kuemmerle. Editing was done by Stefan von Imhof (over 2 cups of coffee).
- Neither Alts nor Altea has any current holdings in any companies mentioned in this issue
- This issue was sponsored by Yieldstreet
