Short CoffeeGIC Agriculture and Softs

Mateusz Borowiecki, Andrew Charlton, Will Marchionni, Ren Yi

General Overview• Supply Concerns• Brazil• Vietnam• Colombia

• Demand Concerns• US • EU• Developing World

• Existing Stocks• ETF Information• Risks and Conclusion

Historic Prices

Supply Overview• Coffee mainly produced in

three nations:• Brazil (34.3%)• Vietnam (18.7%)• Colombia (8.5%)

• Harvested from small bush or tree which takes several years to mature

• Land used for coffee cultivation cannot easily be used for other crops

• Consequence: supply is very inelastic in the short run

Arabica and Robusta• Two main species of coffee

plant grown commercially• Robusta has greater yields

and is lower maintenance, making it cheaper

• However, Robusta generally considered lower quality due to taste

• Consequently, ~75% of world coffee production is Arabica

Arabica and Robusta

• Agrimoney reports that “favourable” weather could help rebound Arabica supply to record heights this year

• First estimate: 49.1m-51.9m bags

• Second highest: 49.2m• Area increase (2.9%); since

2011, number of trees increased by ~4%, mainly in 2011-12

• Slight increase in Robusta (11.4m-12.1m)

Supply in Brazil

Supply in Brazil

Supply in Vietnam• Only 6% of supply sold

domestically• Coffee production a central

part of government’s development policy

• Expected water shortages may affect Robusta harvest; similar to drought in 2014-15

• Some analysts predict Vietnamese farmers will sell crop from past year to get through year, maintaining supply

Supply in Vietnam

Supply in Colombia• Average annual coffee

production of 11.5 million bags is the third total highest in the world• highest in terms of the

Arabica bean• regional climate change

caused production to decline between 2006 and 2012

• Since 2012, continued growth is expected following 7 years• an aggressive tree renovation

program• an increase in organic

production

Demand Overview• Coffee mainly consumed in developed world• European Union (29.7%)• United States (16.0%)

• Demand growing but insignificant in developing world• Ethiopia (2.0%) and Algeria (1.5%) consume more

coffee than all of China (1.2%) and India (0.8%)• Premium coffees growing, but cheap generics still dominate market

Demand in European Union• Largest consumer of

coffee in the world (~30%)• Demand projected to

increase by 400,000 bags (+0.89%)• Not enough increase in

demand to offset rise in supply• Continued economic

weakness puts downward pressure on coffee demand

Demand in European Union

Demand in European Union• Jan 2016: Ban on coffee

pods in Hamburg spurring doubt over future success in Germany as well as other eco-friendly markets• Pod sales of $1.2B in

2015, or 25% of total coffee sales• Category was projected

to grow to $1.6B by 2020

Demand in United States• Second largest market for coffee• Demand for premium coffee

products soaring, especially among millennials

• According to Nielsen Data: premium has seen growth from 16% of market to 18%

• Market still dominated by generic, private consumption

• Maxwell House and Folgers have seen almost no growth in sales (~1% and ~0% respectively)

• At end of 2015, household consumption only increased 1%YoY

Demand in Developing Nations• Markets dominated by instant

coffee (~99% by volume in China)

• Total consumption growth per annum in China has hovered around 15%

• Tea still dominates in both China and India; coffee most popular among emerging middle class

• India is a net exporter; China also produces some coffee but is a net importer

• Massive potential in future, but insignificant over next several years

Stocks• Stocks projected to increase overall in coming year• In past, stocks have been correlated with prices

ETF: JO• Current price: $19.30 at close on 15 March• Fund run by Bloomberg since 2009• Average volume over 3 months: 113,877• Down ~11% YTD; currently rallying

ETF: JO

Risks and Conclusion• Coffee requires lots of water—poor rainfall in major producers could act as a major shock to supply• Relatively low stocks may spur growing prices• Current prices near historic lows already

• Timeline: ~6 months• Will require updates• Target price: $15.75