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What We Are Reading at the International Coffee Organization

We’re starting the new year with a joint December 2014/January 2015 blog post on what our staff and our friends are reading in the world of coffee.

What are you reading? Let us know on TwitterFacebook, or by emailing us at [email protected], and we may include it on the ICO blog and newsletter. Thanks to all who sent us their great suggestions for this blog post!

January 2015:

December 2014:

What are you reading? Let us know on TwitterFacebook, or by emailing us at [email protected], and we may include it on the ICO blog and newsletter.

Investing in Coffee Futures – Black Gold Jumps 50%!

Thankfully, I’m not addicted.

I don’t need it every single day, I can function without it, and a very small portion of my disposable income is set aside for it.

This is a good thing, since I’m somewhat of a snob when it comes to black gold.

And I’m not talking about oil.

You may know this delicious drug as coffee, but to me, it’s heaven in a cup. And when I do crave it, I will go out of my way — and spend a significant amount of money — to ensure that no inferior brew washes over my taste buds.

See, like I said — coffee snob. And I make no apologies for this. But I must admit, in the coming years, my snobbery is going to cost me a small fortune.

A Boost for Your Portfolio

Last Thursday, futures prices for Arabica coffee fell to their lowest in almost five months.

Plenty of investors that were betting on higher prices folded as the shorts moved in. Prices are now down about 25% since peaking at more than $2.00 in April. Fears of drought facilitated that run.

Of course, YTD, coffee prices remain up about 50%. And despite this recent sell-off, I believe coffee prices are going to soar over the long term.

You see, while you may not read about this at your local Starbucks, the global supply of coffee is under threat. This is not hyperbole, either. This is fact, despite the fact that few in the mainstream media are talking about it.

There are actually three threats to the global supply of coffee, and all three seem to be converging at the same time. And while your morning cup of joe is going to become significantly more expensive, if you play your cards right and invest accordingly, your portfolio could also get a very nice boost.

Plant-Choking Fungi

rustleafThe first threat to the global supply of coffee is leaf rust, which is basically a plant-choking fungus.

According to the International Coffee Organization, there is currently an epidemic of coffee leaf rust that’s affecting every country in Central America with a 53% incidence.

This is the worst it’s been since 1976, and per U.S. government estimates, it has caused about $1 billion in economic damage in less than two years. The estimates are predicted to climb, too, as the fungus is expected to spread even further next year.

Eventually, this epidemic will be minimized, but experts warn that will take at least three to five years. In the meantime, however, coffee growers face another, potentially more long-term threat…

It’s Getting Hot in Here

Increases in global temperatures are cause for serious concern among coffee growers, and experts have already published their warnings.

Dr. Tim Schilling of the World Coffee Research program at Texas A&M University noted that the rise in global temperature is of great concern for the coffee industry because it will — and has already started to — put the supply of quality coffee at great risk. This will have a very negative effect on production and, over the long term, will definitely cause prices to rise.

At most risk is Brazil, which supplies roughly one-third of the world’s coffee. Severe droughts have been predicted in the region, and coffee plants don’t like dry weather.

In fact, back in January and February, a drought resulted in the destruction of about 25% of the nation’s crops. Fortunately, warehoused product from the prior year provided a necessary hedge.

Warmer weather also carries with it the coffee berry borer beetle. It actually migrates with warming weather and, according to researchers at Yale, is the most costly pest affecting the coffee industry today, causing more than a half billion a year in damages.

This doesn’t bode well for an industry that’s also growing rapidly.

China Loves Coffee

chinacoffeeAlthough Asia is a continent full of tea-drinkers, there is no doubt that the sweet smell of black gold coupled with a growing middle class has been luring the masses to the bean.

While global demand for coffee has been growing by an average of 2% annually, China, India, and Russia have been witnessing annual growth rates of up to 20% per year.

In fact, according to Starbucks, China will actually surpass Canada to become the second-largest coffee market — after the United States.

No wonder the powerhouse coffee pusher now has more than 1,200 stores in nearly 70 cities throughout China.

Of course, as demand continues to soar in Asia (the UK is also seeing a significant rise in coffee sales), global supplies remain at risk of being insufficient to meet that demand due to a potentially long-term cycle of extreme weather events and the continued propagation of fungi and pests.

For coffee drinkers, this is no good. For investors, this is an opportunity.

Play the Volatility to Your Advantage

Despite the recent drop in coffee futures, two specific coffee ETNs have been performing quite well this year: the iPath Dow Jones UBS Coffee ETN (NYSE: JO) and the iPath Pure Beta Coffee ETN (NYSE: CAFE).

coffeebuzz

I actually believe both of these are trading where they should be right now, although it goes without saying that playing coffee futures is not for the risk-averse. After all, coffee investments have a long history of volatility. But if you play it right, you can use that volatility to your advantage.

Over the long term, I have no doubt that global coffee supplies will be constricted and prices will remain high. I’m not saying to run out and buy these ETNs immediately, but if you have the patience and you don’t mind a little short-term risk, you could do well with either of these ETNs.

And for you coffee lovers, check out this really fantastic Haitian Blue coffee I discovered last year put out by a roaster called Cafe Kreyol out of northern Virginia. Tasty stuff! And not too expensive, either.

To a new way of life and a new generation of wealth…

Jeff Siegel Signature

Jeff Siegel

New coffee study a wake-up call

Whether you like it frothy, skinny, straight or short, coffee lovers around the world face a wake-up call as the perfect storm brews for their favourite drink. For the first time, researchers have mapped suitability for Arabica coffee – the most popular, high-quality gourmet variety with a 70 percent global market share – to see how it will cope in 2050.

The results shows that coffee, which ranks just after oil in its value among traded commodities and is grown in more than 60 tropical countries – with around 400 million cups sipped at each year – will be significantly hit by temperatures above two degrees Celsius and rainfall changes. Production must shift to cooler areas to survive, warn authors – which could spark higher prices and reduced supply for the prized drink.

“For the first time, we’ve collected enough regional data to show that coffee farmers must compensate for higher temperatures to survive,” said Dr. Peter Läderach, co-author of the report and senior climate change specialist for the global CGIAR Research Program on Climate Change, Agriculture and Food Security (CCAFS), led by the Colombia-based International Center for Tropical Agriculture (CIAT).

Major producers – Brazil, Vietnam, Indonesia and Colombia – together producing 65% of the global market share, are set to experience severe losses if adaptation measures are not taken, authors warn.

Taking a hike… uphill

Intercropping with trees to provide shade, or moving to higher elevations where it is cooler, can compensate for higher temperatures by two to three degrees, say authors. Generally, coffee will need to move between 300 to 500 meters further above sea level depending on location to survive.

That’s feasible in Ethiopia or Kenya along the Great Rift Valley, where Coffea Arabica originated and elevations reach 2,400 meters above sea level. But in Brazil for example – the world’s largest coffee producer and exporter, accounting for around a third of global trade – is already cultivated at low elevations and can’t shift further upwards.

“What’s more, Brazil’s highly mechanized, commercial coffee production is not suitable for intercropping with trees, which could provide shade and bring temperatures down,” said Läderach. “That could mean shifting production east – from Central America to eastern Africa and the Asia-Pacific, if strategies are not put in place to adapt,” he added.

Brazil can expect whopping 25 percent losses to current production if adaptation strategies and measures are not taken, authors warn. Nicaragua, El Salvador and Mexico all face slashes in their production and severe economic impacts are expected in Mesoamerica, where Arabica is an important export.

Dr. Tim Schilling, executive director of the World Coffee Research program, funded and driven by the global coffee industry and a partner of CIAT, responding to results said: “A 25 percent reduction in output from Brazil will have tremendous, transformational impact across the entire coffee sector. Net results will be less global supply and increased coffee prices for roasters and consumers.”

Freshly picked coffee berries in Colombia's coffee producing zone, which is suffering the effects of climate change. Credit: Neil Palmer / CIAT

Going East…

Generally, the global study shows that areas between 600 and 1,900 meters above sea level will be best suited to Arabica coffee production, though this depends on many other factors. But just moving coffee upwards may not always be feasible.

Indonesia, one of the top-four producing countries, is expected to see the area suitable for producing Arabica slashed by up to 37 percent. Production could shift to higher elevations, but these typically forested, natural reserve areas are home to indigenous communities and biodiverse environments.

A shift east for Arabica coffee production would be a game-changer for the entire sector, noted Schilling.  But whether it will happen is not obvious, he added. “There is competition for land among other cash crops in Indonesia and the Pacific, and it is unknown whether Africa can build the necessary capacity in terms of politics, business climate, supporting institutions and infrastructure,” he said.

“For me, it all says brace yourselves for higher prices,” said Schilling. “The only glimmer on the horizon is the ability to change the coffee plant so that it produces decent coffee and yields under a climate-constrained environment,” he added.

A coffee farm in Colombia's coffee producing zone in Risaralda. The region is suffering the effects of climate change on the crop. Credit: Neil Palmer / CIAT.

Action now, researchers warn

Coffee takes around five years to become established and bear fruit. That’s a long-term investment for the 25 million farmers, most of them smallholders, who depend on coffee for their livelihoods. This research enables scientists to evaluate new coffee hybrids to perform under a wide range of production environments – including those projected in future.

“We expect to know more about how the genetics of coffee can be used to buy more time,” said Schilling. Information gained by breeders will be invaluable for the development of new, climate-resilient varieties tailored to individual climatic zones.

But research is only one piece of the puzzle. “We need to design adaptation strategies to protect the coffee industry and smallholder farmers that supply it now,” stressed Läderach. “For that to happen, global supply chain actors along the coffee value chain need to collaborate and fund adaptation efforts.”

That’s already happening in Nicaragua. In 2013, adaptation strategies developed by CIAT and partners were included in the country’s national plan, triggering US$10 million in support for the Nicaraguan government to implement them. “Coffee farmers can already feel the heat. It’s time to wake up,” said Läderach. “Or coffee farmers will be forced to find alternatives,” he said.

– See more at: http://www.ciatnews.cgiar.org/2015/04/27/new-coffee-study-a-wake-up-call/#sthash.iKBs5pbb.dpuf

Coffee Disconnect Is Brewing

A growing number of coffee roasters that deal in small farm-produced and best-flavored coffees are leaving the traditional, and more volatile, futures market, which they say has become so disconnected from their business models that it is no longer useful to manage risk.

The rise in demand for specialty coffee, now one of every two cups in America, has upended the coffee market as producers are choosing to invest directly with farmers and take the investment risk alone rather than experience the sharp price volatility in the futures markets—traditionally used as a hedging tool against price fluctuations.

Traders worry that the cocoa market will follow suit as consumers increasingly demand highly specialized beans in their chocolate bars. Changing demands of consumers already upended the tiny frozen-concentrated orange-juice market, which had a huge decline in futures-market participation over the past decade with a consumer shift toward premium orange-juice varieties and away from processed foods.

The price of arabica-coffee futures has grown more volatile over the past few years, affected by everything from an extreme drought in Brazil, the world’s largest coffee producer, to sharp currency fluctuations and higher participation from speculators who rushed into commodities after the 2008 financial crisis. Arabica-coffee beans are considered better quality and better tasting.

Hedge funds and other speculators now represent 22% of bets in the coffee market, compared with 16% a year ago, according to data from the U.S. Commodity Futures Trading Commission. Merchants and producers who deal in coffee futures now make up 38% of the market, against 46% last year.

Producers such as Chuck Patton, owner of Bird Rock Coffee Roasters in San Diego, have extricated themselves from the exchanges in the past three to four years. When Mr. Patton started buying coffee in 2008, all of his purchases were hedged through the exchange; now just 10% to 20% of his coffee comes from brokers dealing in the futures market.

“The specialty-coffee market is really operating independently from the futures market,” Mr. Patton said. “Prices are lower in the futures market, and I’m paying the same to my direct trade farmers as I did last year. What we are basing all of our decisions on is quality first.”

Over the past three years, coffee has been the second-most-volatile commodity on the Bloomberg Commodity Index behind only natural gas. Buyers say using the coffee futures’ benchmark isn’t worth the risk of losing lucrative producers or quality when coffee futures rise or fall.

Specialty-coffee buyers instead are turning to unusual pricing plans to negotiate deals, using alternative benchmarks, and even directly investing in producer farms to ensure consistent quality and loyalty.

Wholesale coffee buyers benefit from these programs because consumers pay $5 more a pound on average for the privilege of drinking better-tasting coffee that comes with a story that connects them with the farmer, according to an Emory University analysis.

Specialty-coffee prices rose 12.5% year over year in the second quarter, to $21.94 a pound, according to the Specialty Coffee Retail Price Index. The most-active arabica-coffee contract on the ICE Futures U.S. exchange fell 24% to $1.324 a pound over that period; it settled Thursday at $1.2425 a pound.

The Intercontinental Exchange Inc., also known as ICE, owns and operates 23 regulated exchanges and marketplaces including futures exchanges in the U.S., Canada and Europe.

The specialty-coffee market disconnect from the futures market has led to the creation of new benchmarks to determine how much a farmer should be paid. Peter Roberts, academic director of the Social Enterprise program at Emory University Goizueta Business School, developed an index that tracks 60 “blue chip” coffee brands in an attempt to bring transparency to growers and buyers working outside the futures market.

Agreements between farmers and roasters are often based on an email or a handshake. Other growers and buyers are using benchmarks based on taste and quality to begin negotiations.

To be sure, coffee-market watchers say they don’t see exchange-traded coffee going away. The number of outstanding contracts in the coffee-futures market is up 56% since 2006 as more coffee is consumed in the world.

While big brands such as Dunkin’ Donuts have recently begun testing coffees from more select origins such as Guatemala and Colombia, futures prices remain essential in order to execute the kind of large-scale purchases, and hedging, necessary to cover their needs.

Chris Fuqua, vice president of marketing and global consumer insight for Dunkin’ Donuts, said the large company doesn’t see a place for small-batch coffees that differ in availability from franchisee to franchisee.

Still, more and more premium grades are trading at prices that don’t change based on what is happening on the exchanges, says Carlos Mera, senior commodity analyst at Rabobank Group in London.

At the same time, long-term price agreements are becoming more common, said Stephen Vick, coffee buyer at Blue Bottle Coffee in Oakland, Calif.

“Every origin is completely different. The needs of that origin are different,” Mr. Vick said. “A lot of times, it’s a matter of finding the farms first and figuring out the supply chain later.”

 

New Study Maps Dramatic Projected Decreases in ‘Suitable’ Coffee Land

A new study commissioned by World Coffee Research, a non-profit research and development program that studies coffee, reaffirms previous work suggesting that there will be a 50 percent reduction in global land area suitable for Arabica production by 2050, while providing a more detailed picture of how climate change will affect specific growing regions.

The study, released this afternoon in the peer-reviewed, open-access journal Plos One, shines new light on what the term “suitability” actually means in reference to future Arabica production, with the goal of helping the global coffee community at large understand how and where producers may be able to adapt to climate change.

“Overall, the Arabica market is extremely threatened,” says Christian Bunn, the study’s lead author, a researcher for the Colombia-based International Center for Tropical Agriculture (CIAT). “There is rising demand. In the future, we’d need more area to grow coffee on, but we’re going to have less.”

Said WCR:

Coffee is currently grown in many different climate zones in the equatorial belt — from hot and dry, to cooler and wetter — but previous studies of coffee and climate change only distinguished between areas that are or will be “suitable” or “unsuitable” for coffee growing. This limited their practical usefulness for adapting coffee to climate change.

This study unlocks the black box of “suitability” and shows how the different climate zones are expected to fare over the next 35 years. This is the first time that researchers have mapped coffee’s current and future climate zones globally.

The maps suggest dramatic reductions in some of the world’s most high-volume growing regions around the equator, particularly those currently characterized by dry conditions. From WCR:


The highest losses will be in hot, dry regions such as northern Minas Gerais state in Brazil, parts of India, and Nicaragua — areas that currently give some of the highest yields of Arabica coffee. Nearly 80% of the land in this climate zone will become unsuitable for coffee by 2050. Cool but dry climates, such as those in western São Paulo state in Brazil, will also see substantial losses.

Mapping current and future climatic conditions and "suitable" growing land in Brazil.

 

Such dramatic reduction of land suitability in Brazil — by far the world’s largest coffee producing country — would naturally have global economic consequences, while affecting the livelihoods of untold numbers of producers. Yet the study also points to current growing areas where Arabica production is least likely to be affected by climate change, while also mapping areas that may develop into suitable coffee growing lands within the next 35 years, including parts of East Africa, Colombia, Ecuador and “possibly” Indonesia.

“Areas around the equator with seasonally constant temperatures, including many parts of Colombia, Ethiopia, Kenya and Indonesia will be least affected by climate change,” WCR said. “Approximately 60 percent of areas with this climate will be unchanged in 2050 — good news for the specialty coffee industry, which relies on these regions for its highest quality coffees.”

The research ties in with WCR’s ongoing International Multi-location Variety Trial, a comparative study of how 35 coffee varieties perform across the world in different climate zones. There are currently 19 countries involved with the trial. While land suitability is a critical aspect in production viability, equally important is adaptation of Arabica varieties themselves, WCR suggested.

“We can use the genetics of coffee to buy more time,” says Tim Schilling, co-author of the report and executive director of WCR. “The information in this report will be invaluable as we work to create new, climate-resilient varieties tailored to individual climatic zones.”

Mapping current and future climatic conditions and "suitable" growing land in East Africa.

Doc Eifrig: The supplement I take three times a day

From Dr. David Eifrig in Retirement Millionaire Daily:

There’s an all-natural dietary supplement you can add to your diet today that will protect your heart and brain… help you live longer… and even boost your sex life.

Regular readers know I’m generally a skeptic of “all-natural supplements.” Most of these dietary aids are sold on the promise that they provide incredible health benefits… Unfortunately, most of these claims lack any shred of scientific evidence and are mostly empty promises.

This supplement, however, is the real deal.

It offers a host of scientifically validated benefits.

It’s delicious. It’s cheap. And it’s so good for you, I take it as much as three times a day. The best news is, millions of Americans can do the same.

What’s the supplement I’m talking about?

Coffee.

According to a July 2015 Gallup poll, 64% of Americans drink at least one cup per day. Some retailer estimates put that number even higher. That doesn’t surprise us, since the average American spends almost $1,100 on coffee every year… and that’s just what folks buy out (at places like Starbucks and Dunkin’ Donuts), and doesn’t factor in what they brew at home.

Retirement Millionaire subscribers know about my love affair with coffee. Dozens of chemical compounds within coffee provide a host of health benefits, many of which I’ve written about over the years. Coffee’s benefits come from three main functions:

  • It fights inflammation. Coffee is packed with antioxidants (caffeine is one of them) that soothe inflammation.Inflammation damages cells in your body, which can lead to cancer and other diseases.
  • It may protect DNA directly. Damaged DNA can start dividing without end, leading to tumors. The exact way it happens still isn’t clear, but some research suggests coffee stimulates an enzyme that fights DNA-damaging toxins.
  • Caffeine blocks adenosine receptors. Adenosine is a neurotransmitter in our brains that sends signals to our body. Its primary role is to signal when we need sleep. This is why coffee keeps us awake (and decaf doesn’t).

Today, we’re giving you the top 10 reasons to indulge in a few cups of coffee every day.

1) Coffee fights ED. About 20% of American men experience some form of erectile dysfunction (ED). The percentages increase with age and certain illnesses like diabetes. But a study from earlier this spring by the University of Texas Health Science Center found that men who drank two to three cups of coffee per day had a 42% lower risk for ED compared with men who drank no coffee.

2) Coffee protects your liver. This year, the World Cancer Research Fund added coffee to its list of ways to protect yourself from liver cancer, the sixth-most common cancer in the world. Each cup of coffee consumed cuts your risk by 14%, according to a report that included an analysis of 8.2 million people. The average best response came from two cups per day.

3) Coffee lowers your risk of stroke. In 2011, the American Journal of Epidemiology featured an analysis of almost a half-million people. It showed a correlation between increased coffee consumption and lower risk of stroke. Other studies, like the 2009 Nurses Study from the journal Circulation, have shown that a single cup of coffee per day reduces a woman’s risk of stroke by as much as 20%, compared with those who do not drink coffee.

4) Coffee alleviates migraines. Caffeine reduces inflammation, which makes it a good way to combat headaches (which can occur from inflamed blood vessels). Many migraine medications include caffeine because it helps the pain relievers work better for this reason.

It’s not entirely clear, but caffeine might also help migraines because it blocks adenosine receptors. The research on the role of these receptors in migraine pain is still ongoing, but caffeine’s role in blocking adenosine is a possible key.

5) Coffee drinkers have lower rates of cardiovascular disease. In a 2014 analysis from Circulation, researchers looked through 36 published studies on cardiovascular disease and coffee consumption. Researchers found a positive correlation between drinking three to five cups of coffee per day and a lowered risk of cardiovascular disease. This makes sense given coffee’s ability to reduce inflammation, which leads to damage in your blood vessels.

6) Coffee helps protect your skin. A 2012 study from Boston’s Brigham and Women’s Hospital found that women who drank at least three cups of coffee a day had a lower risk of developing skin cancer than women who drank just one cup a month.

7) Coffee also protects your colon. In recent studies, including one published this summer in the Journal of Clinical Oncology, patients recovering from colon cancer recovered faster and had fewer cases of relapse if they drank more coffee. And a few studies, including one presented at the American Association for Cancer Research in 2014, showed that the risk of getting colorectal cancer dropped with each cup of coffee consumed, up to three cups.

8) Coffee calms your stomach. A 2010 study published in the Journal of Agricultural and Food Chemistry showed that roasting coffee produces a compound called N-methylpyridinium (NMP). Although researchers don’t understand exactly how it works, they found NMP lowers acid secretion in the stomach. The darker the roast, the more beneficial coffee is for stomachs and heartburn.

9) Coffee protects our brains. Several studies published in the Journal of Alzheimer’s Disease point to coffee consumption as a way to protect the brain from dementia. One of the studies, a Finnish one done in 2009, measured people’s coffee drinking and brain function in midlife (ages 45 to 58). Then the researchers followed up about 21 years later to compare coffee habits with rates of dementia. People who drank coffee in middle age had lower rates of developing dementia later in life.

10) Coffee improves longevity. Several studies on coffee focus on all-cause mortality. All-cause mortality means the number of participants who die during the study period no matter the cause. In one 2014 analysis from the American Journal of Epidemiology, people who drank four cups a day had 16% lower mortality rates from all causes compared with people who drank fewer cups or no coffee at all. Coffee’s many benefits pay off in our overall health.

These are just a few reasons to enjoy your favorite beverage. But as we warned in our sleep issue, too much caffeine late in the day can lead to insomnia. This is because caffeine interferes with our internal clocks – something called our circadian rhythm. To get all the benefits of coffee without losing sleep, do what I do and stop drinking caffeinated beverages after 2 p.m.

Here’s to our health, wealth, and a great retirement,

Dr. David Eifrig Jr.

P.S.
This note originally appeared in my brand-new FREE daily e-letter Retirement Millionaire Daily. It’s delivered every weekday afternoon. And it’s packed with money-saving secrets, tips, and strategies you can put to use right away in simple, everyday language…

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