The Boston Tea Party was the initial push that turned the U.S. away from sipping tea, and ultimately made coffee the nation's second-largest import, after oil. Coffee prices ran up sharply earlier this year, joining in the overall commodity boom.
To capitalize on the growing interest in commodities, the iPath DJ AIG Coffee ETN lets investors buy directly into coffee, benefiting from any price appreciation in this consumer staple during these economically challenging times.
- Inception date: June 24, 2008
- Expense ratio: 0.75%
- Net assets: $4.5 million
The iPath Coffee ETN tracks the Dow Jones-AIG Coffee Total Return Sub-Index, which currently consists of one coffee futures contract. Because the ETN is a note, it doesn't hold assets directly; instead, it's merely an unsecured obligation of Barclays (NYSE: BCS ) , which is currently rated AA by S&P and Aa1 by Moody's.
Because of the exchange-traded note structure, investors should be aware of the credit risk the coffee ETN may pose. The iPath Coffee ETN does not currently make taxable distributions, but the IRS and U.S. Treasury are reviewing the tax treatment of ETNs, so this could change for the worse in the future.
More importantly for investors, the future direction of coffee prices isn't clear. The International Coffee Organization estimates that coffee consumption worldwide grew from 120 million to 122 million bags between 2006 and 2007. That performance is solid but not spectacular, and it could indicate that investing in coffee may not provide the same dramatic results it has in past years.
Overall, coffee prices have followed the general increase in the prices of agricultural commodities. But that trend quickly reversed itself earlier this year, and coffee prices have since fallen significantly from their lofty peaks. Rising production costs related to energy have limited the supply of coffee in recent months, but falling oil prices may change the supply/demand equation yet again.
U.S. coffee drinkers definitely like their cup of joe in the morning. Procter & Gamble (NYSE: PG ) and Kraft Foods (NYSE: KFT ) have battled each other for decades in their pursuit of mainstream coffee drinkers, while competition from niche market players has sparked an ever-expanding array of caffeinated products.
Yet sales shortfalls at high-end grocer Whole Foods (Nasdaq: WFMI ) and coffee czar Starbucks (Nasdaq: SBUX ) shows that economic pain can appear in many unexpected areas. There may well be a point where consumers seek alternatives, or abandon their java fix altogether.
For those looking for a very specialized commodity play, this coffee ETN may be exactly what you're looking for. Most investors, however, can probably give this investment a miss.