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Many soft commodities including coffee are hovering around multi-year highs given tight supply conditions and improving demand. Coffee prices have risen more than 64% over the past year thanks to persistently dry weather in Brazil and the lockdowns in Vietnam due to a resurgence in COVID-19 cases that has led to supply disruptions.
Extreme weather conditions — drought and frost — in Brazil have disrupted the coffee crops, paving the region for the worst harvest in many years. As such, Brazil, by far the world’s largest producer and exporter, is forecast to harvest a much lower crop for 2021-22.
Meanwhile, Vietnam — the world’s second largest coffee exporter — is battling its worst Covid outbreak since the start of the pandemic, and a lockdown in its exporting hub Ho Chi Minh City has delayed the processing and export of coffee beans, adding to production concerns caused by poor weather in Brazil. Vietnam’s coffee exports dropped 6.4% year over year from January through August (read: ETFs to Win & Lose as Delta Variant Cases Surge).
Additionally, protests in Columbia, the third-largest coffee producer in the world, have hampered the transportation of this soft commodity, leading to a price hike. This is because many major supply routes were blocked across the country for months following the protests, leaving many coffee producers unable to transport their crop after the harvest.
Given the tightening supply, the world coffee market is expected to enter into deficit in 2021-22. On the other hand, coffee consumption has increased sharply with the re-opening trade and easing of travel and hospitality sector restrictions. Vaccine availability is boosting confidence in the revival of economic activities and for consumers to venture out. The demand for ready-to-drink coffee is rising. All these factors will continue to drive coffee prices higher, thereby benefiting the coffee chains and consumer packaged goods producers.
The International Coffee Organization (ICO) estimates that global coffee prices will rise 1.9% year over year to 167.01 million bags in 2020-21 due to low supply and supply chain disruptions. The supply/demand ratio will likely tighten, as total supply is forecast to be only 1.6% higher than demand in coffee year 2020-21 compared to 3.1% in 2019-20.
Amid the bullishness, coffee ETFs and stocks seem great choices for the rest of the year. Below, we have highlighted some of them with a Zacks Rank #3 (Hold):
iPath Series B Bloomberg Coffee Subindex Total Return ETN JO
It tracks the Coffee Subindex Total Return, which reflects the returns that are potentially available through an unleveraged investment in the futures contracts on coffee. The ETN has accumulated $98.7 million in its asset base and trades in an average daily volume of 84,000 shares. It charges 45 bps in annual fees.
iPath Bloomberg Softs Subindex Total Return ETN JJS
This fund follows the Bloomberg Softs Subindex Total Return, which consists of three softs commodities futures contracts (coffee, cotton and sugar). Coffee makes up for the largest allocation of 44.2% in the portfolio, followed by 37.4% in sugar and the rest in cotton. The ETN has accumulated $7 million in its asset base and charges 75 bps in annual fees. It trades in an average daily volume of under 1,000 shares.
Starbucks Corporation SBUX
It is the leading roaster and retailer of specialty coffee in the world. The stock saw positive earnings estimate revision of 14 cents for fiscal year (ending Sep 2022) over the past 90 days and has an estimated earnings growth rate of 14.6%. Starbucks has a market cap of $133.7 billion and Growth Score of A.
Keurig Dr Pepper Inc KDP
Keurig Dr Pepper is a beverage and coffee company in the United States and Canada. With a market cap of $49.5 billion, the stock saw positive earnings estimate revision of a penny over the past 90 days for this year. It has estimated year-over-year earnings growth of 15% (read: 5 ETFs to Profit From Higher Food Prices).
Restaurant Brands International Inc. QSR
It is one of the world's largest quick service restaurant companies, owning three of the world’s most prominent and iconic brands — TIM HORTONS (one of the largest coffee shops), BURGER KING and POPEYES. The stock saw solid earnings estimate revision of 16 cents over the past 90 days for this year and has an estimated earnings growth rate of 38.9%. It has a market cap of $19.4 billion and has a Momentum Score of A.
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Starbucks Corporation (SBUX) : Free Stock Analysis Report
Restaurant Brands International Inc. (QSR) : Free Stock Analysis Report
iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO): ETF Research Reports
iPath Series B Bloomberg Softs Subindex Total Return ETN (JJS): ETF Research Reports
Keurig Dr Pepper, Inc (KDP) : Free Stock Analysis Report
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