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Coffee For You Sir?

Coffee. Fragrant, strong and desirable. Its aroma is unmistakable, evoking memories of seven different blends swirled around the understated offices of the International Coffee Organization.

It was the late nineties. The global coffee market was oversupplied and prices were falling as quickly as you could say 'single-shot decaff latte.' The ICO, a coffee OPEC if you will, was on the verge of intervening in the market – it was brewing a plan to 'retain' or take excess coffee off the market in a bid to support flagging prices.

Commodity reporters, myself included, were waiting for the news to break and had precious little to do except read the newspapers, chat and, well, drink coffee. In fact the running joke was that the ICO hoped us reporters would drink up part of the global glut. We did slurp our way valiantly through everything from Ethiopian to Vietnamese blends. But we didn't see prices drop ... appreciably.

Make Mine A Double Latte

Fast-forward to the commodity boom of today and the picture has changed considerably. Consumption is growing and supply is expected to dwindle in some producer-nations such as Brazil, hurt by dry conditions. The coffee market is big business.

Coffee – the other black gold – as a source of foreign exchange, is the second most valued commodity for developing countries, according to the ICO. According to www.the-infoshop.comand Euromonitor, Japan, China and ASEAN countries guzzled US$6 billion (retail value) worth of coffee in 2006. Japan alone accounts for 73% of this figure – that’s over $4 billion the Japanese spent on coffee. Anyone want to work out how many cuppa of Joes that translates into?

But there are no prizes for guessing where future demand growth will be here in Asia. China is the bull in the coffeeshop. "Asia’s, and in particular China's, rising disposable incomes plus an acquired taste for coffee could spur consumption leading to explosive demand," according to Chartwell Partners.

And though China spent a mere $240 million on coffee last year, can you imagine what the demand for coffee will be like if you could persuade just half of the over one billion Chinese to switch from tea to coffee … I can see Starbucks’ executives drooling over their double tall Americanos.

Coffee For You Sir?

Speaking of which, you want a piece of the coffee market action but how best to play it? Given the volatility in the price of coffee futures, investing in the commodity itself is tricky at best. Perhaps the most advisable course of action would be to seek exposure in equities that invest in the retail coffee market, Chartwell advises. The ubiquitous Starbucks chain is the obvious choice.

China could be on track to becoming Starbucks’ second biggest market outside the U.S. It's expanding fast. The coffeeshop operator has bought up Beijing Mei Da Coffee, its authorized developer in North China. It's even muscled in on one of China's famous cultural and historical monuments, The Forbidden City, opening up an outlet next to the Jing Yun Men, the Gate of the Great Fortune, right in the heart of the iconic site.

Needless to say, purists are far from delighted with the high-street coffeeshop's presence filtering down to this most revered of places.

Just Black, No Sugar

Turning to the fundamentals in the coffee market, the signs certainly bode well. Analysts predict prices for arabica coffee beans on the New York Board of Trade may outperform some of the best commodities investments, including copper and silver.

Michael Coleman, managing director at Singapore-based Aisling Analytics has been quoted as predicting coffee in New York may reach $1.30 a pound by the middle of next year. Demand is looking firmer and supply tighter.

The International Coffee Organization sees a 2% rise in global coffee consumption to seven million tons. Meanwhile, the coffee crop produced by Brazil, the world's number one coffee producer, is likely to fall short this year of the nearly 2.5 million tons recorded in 2006. And here in Asia, output from Vietnam has declined because of a drought. From an overall price perspective, the supply and demand scenario is looking positive for coffee producers.

And if the Chinese become as obsessed about coffee, as they are about tea, the rest of us coffee connoisseurs may be forking out a bit more for that cup of expresso. Time to wake up and smell the coffee.

Send your questions and comments to us at commoditystore@cnbc.com. We will answer as many of your e-mails as possible on ‘CNBC’s Asia Squawk Box’ every Friday, 7 am to 10 am Hong Kong/Singapore time.

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