Are You Ready for $5 Coffee?

America's Missing Millionaires Since 2007, over 800,000 millionaires have vanished from America's shores. Like many of us, they've grown fed up with America's out-of-control tax code and greedy government … and they've decided to do something about it. To find out where they've gone – and how you can join them – click here for Bob Bauman's special report. The Contrarian Play in Your Morning Coffee By Andy Hecht, Commodities Editor Dear Sovereign Investor Subscriber, Any successful investor will tell you that the best profit potential lies in going against the crowd. Over the course of my three-decade trading career, that's a lesson I have seen pay off on many occasions. If the price of a commodity (or any asset) is depressed, I look for flaws in consensus opinion. In 1995, I did just that with silver when the price was below $5 and no one on earth wanted it. The same was true earlier this year, when the price of natural gas dipped below two bucks. Today, I'm watching a commodity that most of us are intimately familiar with on a daily basis: coffee. Right now, it seems every analyst in the world is bearish on coffee. But from where I'm sitting, the price of coffee, which has been depressed for most of the year, is showing signs it's about to take off. Advertisement Profit or Perish! A 30-year investment mega-trend involving a key financial sanctuary for millions is about to crash – with devastating effects on a global scale. Prices for virtually everything will soar as horrified investors see their stocks, dividends and retirement portfolios go into free fall. But some investors are going to get rich, just like in the 70's. You can be among them… if you know what to do now. Learn more here. While this gives us a great opportunity to make a contrarian play, it also gives us a chance to make sure we protect our portfolios from companies that could take a big hit from coffee's rise. A Down Year for Coffee Prices After peaking at more than $3 a pound in May 2011, the price of coffee has plunged. Bountiful crops in Brazil, Vietnam, Colombia and Indonesia (as well as other coffee-producing nations) easily met global demand. See larger image As the chart above illustrates, with the 50% drop in price this year, coffee is a commodity that is prone to price spikes – it's one of the most volatile commodities that trades. Despite that, the downside in coffee is limited given its tight supply and demand, but the upside potential is explosive. Mother Nature Strikes Again The weather over the past two years has been ideal for growing coffee beans, but there are signs that this is about to change. Brazil is the world's largest exporter of coffee. Brazil exports more than two times as much java as the second largest exporter, Vietnam. And, a very wet summer in Brazil resulted in premature blooming of coffee trees during their normal resting period. This will put a strain on the new coffee crop and reduce yields during the coming harvest. In fact, expectations for this coming off-season crop of 51 million bags may actually come in at only 45 million bags … that's a 10 million bag reduction from last year. Additionally, the likelihood of an El Niño weather pattern could reduce the crop yields of large coffee producers in Vietnam and Indonesia. We have seen weather issues wreak havoc on grain crops in the U.S. this year, and bountiful coffee crops last year do not guarantee the same for the coming year. Demand Remains Strong While supply could be constrained this year, demand will continue to grow. Coffee demand has been rising around the world – global consumption has grown by 1.2% since the early 1980s, according to the International Trade Center. While there has been very little growth from the U.S. and Europe, growth from Asia has been impressive. Japan's coffee demand has grown at 3.5% a year over the same period. In other Asian countries, demand has grown by over 6%. This demand for coffee has contributed to a decrease in stockpiles. The stock-to-use ratio for coffee has been trending lower. That means there are fewer stockpiles of java beans to make up for any shortfall in production. With such a tight supply, the price of coffee has nowhere to go but higher. And, as a highly volatile commodity, when the explosion finally happens, it will happen quickly. Preparing Yourself for Coffee's Spike When the price of coffee spikes higher, two things will happen: Consumers who have become complacent will suddenly have to pay higher prices for the commodity. And, higher prices will cause demand to decrease. It is very difficult for a coffee consumer to hedge their price risk on a long-term basis. As an agricultural commodity, coffee can't be stored over long periods of time. Coffee will rot and deteriorate. This makes hedging price risk very difficult for consumers. Higher coffee prices will affect the economics of companies like Starbucks (SBUX). Starbucks will have to pay more for the precious beans, and they may not be able to raise prices fast enough to keep up with the increased cost of their main ingredient. Even if they do raise prices, consumers will not necessarily pay even more than the $5 that Starbucks would have to charge to keep turning a profit. In either case, a sudden spike in the price of coffee will decrease profits and the price of SBUX will drop. See larger image Since 2009, SBUX has moved from under $10 to almost $50 a share – a 400% increase. The coming rally in coffee will cause a reversal in this stock, so beware … if you have SBUX – or any other popular coffee vendors – in your portfolio, it may be the perfect time to cash in on them. For a direct investment in the coffee market, you might want to look at two ETN products: The iPath Pure Beta Coffee ETN (CAFE) and the iPath DJ-UBS coffee TR Sub-Idx ETN (JO). CAFE is highly illiquid and only has net assets of $2.7 million. The iPath DJ-UBS coffee TR Sub-Idx ETN is slightly more liquid – with net assets of $27.06 million. While both ETNs are illiquid, this could work in a buyer's favor. Once coffee starts to move higher, these ETNs will attract investors. At that point, their illiquidity may cause them to move even higher than the price of coffee itself. Both are trading close to 52-week lows, and when coffee starts to move higher, these ETNs could explode as the world wakes up and realizes that coffee is too cheap. A contrarian approach always provides the opportunity for spectacular profits for those who are brave enough to take the risk. Today, an investment in coffee is a contrarian play backed up by some compelling fundamentals. Ponder taking profits on SBUX now, or even buying either of these two ETNs as you sip your next cup… Your eyes and ears in the commodity markets, Andy Hecht P.S. While coffee consumption in the U.S. continues to grow slowly, as we saw above, it is Asia that is driving the real growth in demand. For U.S. companies that can tap into these growing Asian markets, they are positioning themselves for solid, strong, long-term growth, no matter what happens here at home. These are exactly the companies Jeff Opdyke is looking at in his Global Growth Strategist service. To learn about his latest discovery – and it's potential to generate historic gains – click here for his special video report. Related Reading: What to Own as Silver Gets Ready to Rally Where H.J. Heinz is Telling You to Invest Now Why Mid-West Drought Will Drive Up Gasoline Prices Is The World's Biggest Ponzi Scheme About to Unravel? RECENT ARTICLES 9/05/2012 Where H.J. Heinz is Telling You to Invest Now Follow Heinz's lead and invest in emerging markets. New consumers are growing tremendously and emerging, global companies will profit. 9/04/2012 Profiting From the Other Debt Crisis Japan's government debt has reached epic proportions. So the yen is about to implode. Invest in Japanese companies with profits overseas. 9/03/2012 Why America is Losing the Battle for Business Fewer U.S. immigrants are starting small businesses because of the red tape the U.S. has with it's E-2 Investor Visa program. 8/31/2012 How to Find the Most Promising Takeover Targets One of the quickest ways to make big gains through the markets is by investing in poetential takeover targets, such as baby multinationals. STATE OF OUR WORLD National Debt Clock: $16,004,885,392,507 BECOME A MEMBER For more valuable information from The Sovereign Society on how to protect and grow your wealth, become a member today. JOIN NOW SPECIAL REPORTS Jeff Opdyke 2012: The Year of Yield Andy Hecht Metals More Precious and Profitable than Gold Bob Bauman How to Escape America, and Where to Go STAY INFORMED Whitelist Us Follow Us on Twitter Like Us on Facebook   Privacy Policy The Sovereign Investor 98 S.E. 6th Ave, Suite 2 Delray Beach, FL 33483 The mailbox associated with this email address is not monitored, so please do not reply. Your feedback is very important to us so if you would like to contact us with a question or comment, please click here: http://sovereign-investor.com/contact-us/ Legal Notice: This work is based on what we've learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It's your money and your responsibility. Nothing herein should be considered personalized investment advice. 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