Outlook on the 2013 coffee market trends. The focus on the East and the growth opportunities represented by Asia could not be clearer. This year, I have spent time in both Asia and the US, actually just a week apart, and the sentiment in the retail sector could not be any more different. No empty shops, no sales and no shortage of customers willing to spend – maybe not as brisk as a few years ago, but nonetheless spending.
Take a look at the world’s largest clothing retailer, Zara, who’s founder – perhaps coincidently – is now one of the world’s richest people. How have they enjoyed this stellar growth? Part of the answer lies in their expansion into the East, most notably China. The Chinese population is vast – with an ever growing middle class, hungry to spend. To give some scale, within the next 15 years, the Chinese middle class is expected to top 800m people. In India, research suggests within a similar time frame, the middle class there will top 583m people! These are simply staggering numbers.
So a slowdown in the West – be that Europe or the US – could this new demand take up the slack?
One company that has come up on my radar is Starbucks. Far from being concerned of the slowdown in its home markets – the US and Europe, the refocused and re-invigorated business just had its best quarter EVER, earlier in the year. Sales of $3.2bn – up 15% would suggest its rethink has worked. A different approach locally, together with a broader product range plus a huge push into China has lifted the business substantially. Add to that, the company’s first opening in India and assuming there is a take up in those markets – all evidence would suggest there is, and Starbucks, like Zara will be sitting in a great position.
However, as a trader and investor, is it simply the company’s expansion and potential growth which points to opportunity? The answer is likely no. How about the leveraged opportunity of the underlying commodities? What could happen to coffee prices, with another 1.3bn people on the planet enjoying a daily brew – and not just coffee, but the sugar (and its caramel latte shot derivates) that will also be going along for the ride.
Currently, coffee is trading at 1.50 or there abouts, having been in a decline for most of the past 12 months. Sitting at longer term lows, these levels may represent a robust entry level for those looking to capitalise on rising demand, especially that stemming from the new Eastern markets. However, like all trades, looking at one aspect, in this case, demand, can be a little imbalanced.
As a result, let’s take a look at the supply side.
South American production has been extremely strong. In Brazil, there is talk of holding back this year’s harvest, which has been a bumper one. Equally, in Colombia, there has been a 13% increase in production, marking 6 months straight of growth, while 2013 is expected to see a 7 year high in production. All possible reasons for this year’s decline from highs of around $300.
So will the growth in demand be enough to outstrip supply? I suspect not immediately, however, over the next 5 years, that is more than a possibility. As such, our short term target remains around the current $150 level. However, longer term – $300 is certainly not out of the question – after all it has been at that level with the past 12 months. Now specifically, for coffee, the Futures contract is worth $375 a point. As a result, a move to $300 from current levels would yield in excess of $50k in potential profit.
This has the potential to be a generational move which, with the right trading strategy, will have the ability to kick-start your trading profits in the same way as a triple espresso may give you a lift, in the morning.
Like all forecasts or predictions given at any time, these can very quickly become out of date. This is a critical point when it comes to successful trading and investing. It is not really about successfully predicting what may happen – the real money is made by responding to what is actually happening and by taking the necessary action accordingly. For many, joining the dots between theory and practise can seem daunting and perhaps confusing so, to make that journey so much easier and one that caries confidence, why not check out one of our free online training sessions. Click here to register