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Ask Justin

Ask Justin

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Are coffee and orange juice good investments?

Investment | Commodities Helpful? 8

Asked by greenbee, submitted 17 December 2010.

Open Quote Are orange juice and coffee a safe haven for financial investment? End Quote

Answered by Justin on 21 December 2010

The price of orange juice and coffee depends, like all commodities, on supply and demand. And, if you're British, the dollar/pound exchange rate too as most commodities are traded in dollars.

Climate has the biggest impact on the short term supply of agricultural produce - bad weather is the main reason prices of crops including coffee, oranges and corn have soared this year.

Longer term supply tends to be influenced by price - if prices are high more farmers will be encouraged to switch crops, if feasible, to make more money.

Demand is largely a product of lifestyle. If coffee drinking becomes more fashionable, as it has done in emerging markets, then you'd expect demand to rise. Although some commodities have also benefitted from growing alternative use demand, e.g. corn being used for biofuels.

Are soft commodities a good long term investment? In general I think yes. Climate change, growing populations and greater affluence in emerging markets should all serve to boost prices over time if supply can't keep up with growing demand.

But are they a safe haven? I don't think so as short term prices can be very volatile, exacerbated by exchange rate movements. If better weather produces a bumper harvest next year then prices will probably fall from their current levels.

Playing the agricultural commodity markets short term is a gamble unless you can accurately predict global weather. And because there are a lot of commodity gamblers (sorry, speculators) their views can affect prices which further adds to potential volatility.

For example, if speculators expect bad weather they might buy up orange juice futures expecting the price to rise (futures allow you to buy or sell a commodity at an agreed future price). This in itself will increase demand for the futures and push up prices, but if the weather turns out to be fine the futures price will likely fall again. Given futures are the usual way to invest in agricultural commodities (as it's impractical to buy and store crops yourself) this means higher all round volatility for investors.

Top give you an idea of the volatility: the one month futures price of frozen orange juice concentrate moved from about $1.10 per pound in August 2008 to under 70 cents then back above $1.10 within the space of a year.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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