I wrote about the green coffee market as recently as this March, but I think it is worth another look, in the light of recent developments, especially its sizable upward push. We have climbed to new annual highs, as of this writing, and this time is even more of a head-scratcher than the last two big upward moves.
The trend seemed to have started with a drop in the U.S. dollar, which had been propping up the Brazilian real. That meant that Brazilian producers would get less money from the sale of a pound of coffee, which is traded in U.S. currency. That seemed quite reasonable; a small bump-up seemed warranted and, when it occurred, it was taken in stride.
It's Always Something
In short order, a cold front moved into the southernmost areas of Brazil, bringing with it the risk of frost in some coffee-growing regions. Nowadays, this is more of a psychological concern than a real threat, as most coffee plantations have moved northward, away from the threat of Antarctic winter weather bringing frost, but that did not stop the move upward from gaining the attention of the "super funds." The funds dove in and moved the price even higher.
We then had Britain decide it no longer wished to be partnered up with a faltering, overly bureaucratic European Union, and vote to make its exit (the "Brexit"). This drove up all commodities, and coffee went along for the ride.
Lastly, Vietnam came out with lower coffee production numbers, and this woke up the London robusta market. You would think there would be no effect to the Arabican market, but in this case, the "spread" between the two markets was maintained; that meant further Arabican upside.
The great irony of our time is that, with so many funds watching nothing more from a technical perspective than price levels, regardless of any underlying fundamentals, a move up in prices prompts more buying as "resistance levels" are broken through and the technical data points to higher levels ahead. Talk about self-fulfilling prophecies! If everyone believes a market will go up, it will go up. Our dilemma is in trying to decipher when the craziness will stop, and the big money will move on to other, greener pastures.
I mentioned in my March column that it would be prudent to watch for a breakout above $1.40, as that would mean a higher move from there. At this writing in late July, we reached $1.54 before a weak pullback.
We are still in the middle of Brazil's Southern Hemisphere winter frost season, and any news of a new cold front would likely have an outsized effect on the futures. It would be easy to see us get up to the $2+ area under this scenario. Discounting that happening, there is not really much impetus for further upside from here -- unless fresh news comes out bringing into question overall crop yields and world stock levels.
Morgan Stanley put out a report on coffee recently that, upon reading, I found completely unclear as to where even they believe the market is heading. With money out there big enough to move a market the size of ours, (coffee is only eclipsed by oil as a futures market), we smaller players, who actually need to use the futures market as a means of keeping our pricing steady, are left to throw darts at a proverbial board and hope we are correct.
Intuition tells me we are not done here, and may well see at least $1.60 before the air leaves the balloon. However, as Morgan pointed out, the last time the market broke $1.60, it took a year to see levels get back below $1.50. This certainly provides food for thought, as you consider how far out your coffee position should be.
As always may your cup run full, and the brew be exquisite.
KEVIN DAW is president of Heritage Coffee Co. (London, ON, Canada), a private-label roaster serving the breaktime management industries. A 30-year veteran of OCS, water delivery and vending operations, he has concentrated on coffee roasting for the past two decades.