Coffee’s not just a drink, it’s an investment option

Coffee is a millennial’s best friend. While generations have relied upon coffee to reach a normal level of functioning on a daily basis, millennials have elevated need to love and love to snobbery. While baby boomers may prefer Folgers or Maxwell House, either will do. Meanwhile, millennials debate the finer points of Ethiopian Yergacheffe and Indonesian Sumatran like connoisseurs of fine wine. The fancier the coffee, the better.

In our defense, we grew up in the Starbucks era when the $5 cup of coffee became a regular part of life. But as our obsession grows, the supply of coffee beans rapidly declines. A report by the Climate Institute advised that half of the world’s coffee could disappear by 2050 because demand mounts while weather conditions in Brazil, Ethiopia, Colombia and Vietnam gets dryer. Millennials are such a large generation that our tastes and preferences are affecting the commodity markets in ways that we probably aren’t aware of.

A basic, interchangeable, valuable good

A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. The distinction of a commodity is that it is basically uniform across producers. The quality may differ slightly, but if it is traded on an exchange, it must meet specified minimum standards known as a basis grade. Some of the most commonly known commodities are oil, grains and gold.

The history of commodity trading is a long and rich one. The very reason commodities are produced in large quantities by many different producers and are of a uniform quality is that they are staples of human civilization: the foundation of our diets, the raw materials of our production, the energy powering our tools and conveniences. And as you can imagine, the impact of these markets is vast. Energy, metals, livestock and meat, and agricultural products are the four commodity categories that you can trade. The most popular exchanges are the CME Group, Intercontinental Exchange and London Metal Exchange.

One of the secrets to Southwest Airlines’ success

To give you a “real-life” example of how commodity trading works, one of the most notable recent oil hedges was done by Southwest Airlines during the financial crisis. Flyers and investors alike watched the major airlines to see which would stay afloat (aloft?). As it turned out, Southwest was the only large U.S. carrier that remained profitable through the downturn. A big part of that success was their betting correctly on what the price of oil would do. Years before the crisis, they bought a call option which gave them the right to buy fuel at a certain price for a certain number of years. That call option gave them the right to buy fuel at $51 per barrel throughout the downturn instead of the going rate at $140 per barrel. Not to take anything away from Southwest’s great culture and customers service, but what an enormous competitive advantage!

Companies all over the world use extremely complicated strategies involving commodities. But don’t be mistaken, there are ways for the average person to invest in them, too. Exchange Traded Funds (ETFs) have become a popular way for people to invest in commodities. They are usually focused on either a single commodity (like coffee), holding it in physical storage or focused on futures contracts.

Another asset class to consider

The important takeaway is that commodities are yet one more asset class that could diversify your portfolio of investments. Typically, people think of investing in stocks, bonds and real estate. Talk to your financial advisers. It could be that the building blocks of your favorite over-priced skinny, decaf, no-foam latte that pairs so well with your favorite over-priced hybrid, artisan, bite-size dessert could also be the building blocks of an outperforming portfolio!

Jennifer Pagliara is a financial adviser with CapWealth Advisors. Her column appears every other week in The Tennessean. For more information, visit www.capwealthadvisors.com.