Investing in Coffee

An Ethical Investment in Coffee

Written by Brian Hicks
Posted June 3, 2015 at 8:00PM

pachaThree pounds of raw coffee beans from Ethiopia just arrived at my doorstep.

Thanks to the good folks at Pachamama, I was able to buy my beans direct from the farmer, thereby ensuring that the folks who did all the hard work are compensated properly – without the interference of corporate hustlers and middlemen.

Now I'm told that I'll enjoy the subtleties of honey and apricot in this coffee, which is grown in the Yirgacheffe region. Certainly I'm excited to roast some up tonight. And in a few days, after taking my first sip, I have little doubt that my senses will be sending orgasmic cartwheel signals to my gustatory cortex.

Although plenty of folks enjoy coffee as little more than a morning pick-me-up, I treat it a bit differently. To me, drinking a quality cup of coffee is a privilege, and I'm honored and humbled by the farmers who provide me with my daily dose of euphoria.

It's not as if I couldn't survive without it, but damn life is a lot better with good coffee.

Respect the Bean!

As a loyal subject of the almighty coffee bean, it should come as no surprise that I'm very protective of those who make their living cultivating this heavenly plant. For the most part, I only buy direct from the farmer, and I spend a lot of time (probably too much time), researching various producers, regions, and wholesalers.

I want to know that my coffee is pure. That it was grown in a responsible and sustainable manner, without the use of chemical pesticides and fertilizers. And I won't buy my coffee from a producer that treats its farmers like peasants and their children like afterthoughts destined for a life of illiteracy and poverty.

Does this cost me more? Of course it does.

But the ethical cost of doing business with those who don't respect the bean or the farmer is much greater.

Of course, when it comes to coffee, there's a much bigger threat than those who don't do right by this magnificent gift from God.

Coffee Futures are going to Soar

Last year, I published a piece about a 50% spike in coffee futures, writing …

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.

When I wrote those words, coffee futures had already spiked, and coffee ETNs were crushing it.

Check out this chart that shows the iPath Dow Jones UBS Coffee ETN (NYSE: JO) and the iPath Pure Beta Coffee ETN (NYSE: CAFE).

cfetns

Since then, coffee futures have plummeted, and both of these ETNs are trading at record lows.

But mark my words, as the heavy hand of global climate change smacks us on the ass like the disrespectful children we are, coffee futures are going to soar again.

A Good Deal

According to a recent report in the journal, Science Direct, rising nighttime temperatures in the coffee growing region of Tanzania are leading to a drop in Arabica yields.

Check it out …

Coffee is the world’s most valuable tropical export crop. Recent studies predict severe climate change impacts on Coffea arabica (C. arabica) production. However, quantitative production figures are necessary to provide coffee stakeholders and policy makers with evidence to justify immediate action. Using data from the northern Tanzanian highlands, we demonstrate for the first time that increasing night time (Tmin) temperature is the most significant climatic variable responsible for diminishing C. arabica yields between 1961 and 2012. Projecting this forward, every 1 °C rise in Tmin will result in annual yield losses of 137 ± 16.87 kg ha−1 (P = 1.80e-10).

According to our ARIMA model, average coffee production will drop to 145 ± 41 kg ha−1 (P = 8.45e-09) by 2060. Consequently, without adequate adaptation strategies and/or substantial external inputs, coffee production will be severely reduced in the Tanzanian highlands in the near future. Attention should also be drawn to the arabica growing regions of Brazil, Colombia, Costa Rica, Ethiopia and Kenya, as substantiated time series evidence shows these areas have followed strikingly similar minimum temperature trends. This is the first study on coffee, globally, providing essential time series evidence that climate change has already had a negative impact on C. arabica yields.

I'm sure there are plenty of folks out there who will seek to discredit this report. And in all fairness, that's how science is supposed to work. But I maintain that just like pretty much everything else that Mother Nature has provided us, a continuation of extreme temperatures and weather events is going to strike a serious blow to global coffee supplies.

As a result, I recommend making a conscious effort to buy your coffee from growers that already implement sustainability strategies that tend to provide a lot more flexibility when it comes to adapting to new challenges.

Doing so will result in the ability of these operations to further invest in these strategies and the natural capital required to maintain healthy soil and plants.

Conversely, those growers that rely heavily on chemical and synthetic inputs, thereby degrading the soil and the viability of the plant, are likely to get hit the hardest. Buying your coffee from these folks will primarily result in these growers seeking more chemical and synthetic inputs that'll only further liquidate the natural capital required to grow healthy coffee plants.

And if you're an investor, but want to look beyond just those two ETNs I mentioned above, we continue to search the globe for new coffee operations in which to invest through private deals. Although these deals tend to be available only for accredited investors, the opportunity to do right by the planet and by the bean can also result in some ethical profitability. Not a bad deal!

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

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Jeff