Friday, March 23, 2018 | Today's Vending Industry News
Opposing Forces Cloud Future Coffee Price Trend Predictions

by Kevin Daw
Posted On: 9/13/2017

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This month I'd like to discuss coffee futures, options and all things market-related. We have seen a large drop and rebound in prices, making for three large market moves in just the past seven years.

It is worth taking a look at a long-term chart of the coffee market to get a sense of how volatile our commodity can be, so let's summarize the highlights.

The market reached its all-time highest point ever all the way back in 1977, or 40 years ago. This was caused by what was labeled a "black frost," which had decimated the Brazilian crop and damaged the trees in 1976. Fears of a coffee shortage sent the market all the way up to $3.30/lb. In today's dollars that is quite incredible, but there was a fear that if one more frost were to hit during Brazil's '77 winter (our summer), the world might literally run out of coffee, since stockpiles had already been drawn down.

As a result, it would take a full 10 years before the market dipped back below $1. Once it did, however, it stayed there for five years. I recall that time very well, because I spent it as a national sales rep calling on office coffee service companies. OCS operators were lamenting the continued low prices, as it was difficult to hold prices on the street against price-choppers out for market share.

However, the market then popped on a severe frost in 1994, and held above $1 (for the most part) until 2000, when it once again plunged below a $1 -- and, once again -- held below that level for six years until it finally popped back above $1. It has stayed in this range ever since.

This is not to say the market has not been volatile. To the contrary: since 2009, we have flirted with the $1 level twice, been above $2 twice, and been above $1.50 three times in total. Looking at a long-term (50-year) chart, a pattern appears in short-term swings, and an even more pronounced pattern over longer periods. It looks as though, if history were to repeat -- which it often does in markets -- that we could see sub-$1 levels within a year or two. Not necessarily now, or next week, or even this year, but at some point over the next couple of years.

This could explain why there is a record amount of short positions in the futures market. By no means am I suggesting we get there, but some people look at T&A, (technical analysis) almost exclusively using 50-day, 200-day  and multiyear average trend lines to take their positions on where they believe the market will head. Right now, positions point downward; there is big money placing bets in that direction. If you have locked in a futures level in the $1.20s, $1.30s or $1.40s, there is a way to mitigate a downside while remaining fully protected, through your futures to any unforeseen move upward. The best mechanism to achieve this is by purchasing put options.

A "put" means a contract of coffee, 37,500 lbs., is going to be given (put) to one party by another party at an agreed-upon price at an agreed-upon future date. So, by buying a $1.35 July 2018 put at this writing, you would have a cost of $.0788 per pound (the numbers will be different by the time you read this). You are now protected, beginning at $1.2712/lb. or less. If the market were to drop between now and next July, falling below that figure, you would earn penny for penny on that drop, effectively paying for a year's protection against a prolonged big drop.

This is one simple example of what is out there, but there is little sense in getting too complicated, and even this concept is not for all. Options trading is not a part-time or amateur endeavor. Seek advice from a professional before attempting to trade options, and be sure you understand that the potential loss is 100% of what you invest.

One thing that could have an adverse effect on pricing, especially of Brazilian beans, is an outbreak of coffee berry borer beetle (sometimes called broca del café -- a broca is a drill bit), a parasitic insect that is estimated to be affecting up to 45% of Brazilian coffee trees. That is no small number, considering Brazil is the world's largest coffee producer. This trend bears paying attention to if it continues or worsens.

This leads to my last comment on coffee production this month. Over many years, coffee scientists have developed hybrid strains of coffee, hardier versions of existing and heirloom varietals to resist coffee rust and other biological threats. This is very good for the continuity of supply we all expect and enjoy, but unfortunately it seems to really have a negative effect on cup quality. It has become less and less common to taste outstanding offerings coming from Central and South America where so much of North America's quality blends procure their arabica beans. It is a shame we must give up a little in quality to be sure there is enough coffee going forward, and I hope we do not find ourselves having to settle for ever-diminishing returns should trees continue to require further hybridization.

As always, may your cup run full, and the brew 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.