The Perk of Investing in This Global Addiction

I was in a mad dash for my car.

Thunder roared through the sky, rain and wind whipped around me, and I desperately wanted to be inside my tiny red Toyota so that I didn’t have to keep squishing around in my rain-soaked shoes.

But suddenly, a bright green mermaid logo peered out of the mist on the other side of the parking lot. And I found myself strutting past my car toward the Starbucks beacon.

When coffee’s siren song calls to a caffeine addict like myself, well… not even a monsoon will stop me.

And as an investor, it might make you consider coffee’s supply-demand story if you weren’t already.

That’s a smart move right now.

Yes, coffee has a jittery history: It’s one of the most volatile commodities to trade on the U.S. and global futures markets. Every year, sentiment and price are shaped by the weather conditions in key growing regions. When the forecast is just right, and there are no fungal plagues ravaging crops, prices are lower.

But then a critical area of coffee growth is hit by, say, a devastating drought, like Brazil – the world’s biggest producer, accounting for more than one-third of all coffee supply – in 1986. And coffee’s price rockets. (There are additional volatility drivers, by the way, such as persistent currency fluctuations.)

In the end, this type of unpredictable, jerky movement scares investors.

But the fact is, global coffee demand is expected to double by 2050.

Meanwhile, we’re on the back of a three-year supply shortage, since critical growing regions like Brazil continue to experience severe and erratic dryness.

To top it off, the genetic diversity of the Arabica coffee bean – the highest quality bean and the main one consumed – is extremely low. That means the plant can’t adapt to changes in the environment quickly enough, underscoring the crop’s fragile grasp on survival.

Unsurprisingly, inventories are struggling. The International Coffee Organization expects coffee production to reach a record 153.9 million bags globally for the now-ending 2016 to 2017 season. But demand is forecast at 155.1 million bags. That’s a difference of 1.2 million bags.

Yes, much of this knowledge has been priced into coffee. But it’s clear that the crop is facing an “existential crisis” as Ric Rhinehart, executive director of the Specialty Coffee Association said.

And that’s the long-term supply-demand story.

I know you’re probably thinking: “That’s all well and good, Jess. But what does this mean for investors in the short term?”

The price of coffee is heating up. The consensus estimate is a climb of another 5% for Arabica coffee prices over the next year. But that’s being conservative.

As one expert says: “The short-term volatility should give us a double-digit move. This isn’t a slam-dunk, huge gain, but the sentiment extreme and the traders’ forecasts line up for a solid gain.”

And there are two ways to invest in it: the iPath Bloomberg Coffee ETN (NYSE: JO) and the iPath Pure Beta Coffee ETN (NYSE: CAFE), launched in 2008 and 2011, respectively. If you pick up one of these, cash out after a 10% or 20% gain.

Double Your Nest Egg With Gold Miners

Diversify or perish. I think that’s an H.G. Wells quote.

OK, OK, I know it’s actually “adapt or perish.” But if H.G. Wells managed investments rather than words, I bet he would have tweaked that quote to my version.

In fact, you’ve probably heard that golden nugget of investment wisdom before. It’s something every investor should be well-acquainted with because it’s the key to successful investing.

Plain and simple: Never put all of your investment eggs in one basket. If the market falls out from under that basket, your nest egg is going to crack and spill your savings all over the floor.

It’s an easy bit of advice, I know. You can say that diversifying is the smart route, but what exactly should you diversify with?

For that question, I have one answer today: metal mining companies.

Every investor should have a bit of exposure to miners – especially small-cap miners, if you like capturing the quick pops that most of Wall Street tends to miss out on.

It simply gives you access to above-average share price volatility. Particularly today.

Now, many of you might be saying: “But isn’t that a little risky?”

It can be, absolutely. Any sector that sees consistent volatility (like crypto assets) can be a bit risky – but much of that risk is managed by having a plan in place. That protects you from making knee-jerk moves or holding onto investments longer than you should.

You just need the right strategy. And if you don’t have one in place, I’d say you should start looking for one now, because the spotlight is starting to shine on the mining industry as the commodity market recovers.

According to a report by PwC released last year, the mining industry saw a turning point in 2016. The top 40 mining companies aggregated a net profit of $20 billion – which handily tops the $28 billion loss of 2015. Meanwhile, their valuation climbed into 2017.

In fact, the market capitalization of those 40 companies rose 45% in 2016 to $714 billion.

And the good news is continuing for miners.

Take gold for instance. Miners are particularly sensitive to rising gold prices right now. As gold continues to climb (and it will), gold mining stocks will soar.

It’s time to go long in this area.

In fact, since early December, the VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ) has been climbing away from its support line around $30. It’s now up about 14.8%, a nice rally that could prosper further if it breaks through current levels.

Hurricane Irma Gave Us a Bull Market

The great 1983 Eddie Murphy/Dan Aykroyd film Trading Places features two duffers pulling off a massive commodity futures scam. It was orange juice futures. They made a fortune by betting on the orange crop in Florida.

Thanks to Hurricane Irma carving a path of destruction through Florida, you can do the same thing today.

After Brazil, Florida is the world’s second-largest producer of oranges.

The orange juice industry is in a massive decline. Sales fell 14% – about a $98 million fall from 2012 to 2016. Some food exchange-traded funds that once held futures no longer use them as an investment.

It doesn’t help that we now know that it is bad for you. It has the nutritional value of soda.

Business Insider called orange juice the “biggest con of your life.” That’s important, as the U.S. is the world’s largest consumer by many times, over and above any other country on earth. We consumed over 630,000 metric tons of the drink last year.

Irma’s Impact

Frozen orange juice futures tanked over the past year. After peaking in October 2016 at $225, the JPMorgan Orange Juice Price Index fell 44% to a low of $125 in July 2017.

The price jumped 21% in two weeks as Hurricane Irma grew and took aim at Florida.

The Florida orange crop looked particularly strong this year. Shannon Shepp, the executive director of the Florida Department of Citrus, wrote:

Before Hurricane Irma, there was a good chance we would have more than 75 million boxes of oranges on the trees this season. We now have much less.

To put that in perspective, last year’s crop, the worst since 2005, was about 77.9 million boxes. That crop sold for $800 million. In Florida, 90% of the oranges become juice.

This year, the orange crop looks like it will be the lowest in 50 years. As you can imagine, that pushed the price of futures up.

Sadly, unless you trade commodities, regular investors struggle to get in on this position. One way is the Elements Agriculture Total Return ETN (NYSE: RJA). It holds 1.8% of its assets in orange juice futures.

That’s about the best way I found to trade what could be a nice winner in orange juice. That’s typical with these trends. Sometimes, it’s hard to find a way to profit from them, even when you find a great opportunity.