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Funds Hold Wild Card In Coffee Pricing
Kevin Daw What a wild ride the coffee market has given us this year! It would seem every year has become a wild ride of one sort or another as the coffee market goes. This year was no different, as we opened the year at around the $1.40 area for the December 2018 contract position and, after a stair-step decline that saw the market dip below $1 for the first time in 12 years, December as of this writing is back near $1.25 per pound. The whipsaw-like movements that have accompanied these mo...
November 13, 2018 | Kevin Daw
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| Kevin Daw |
This year was no different, as we opened the year at around the $1.40 area for the December 2018 contract position and, after a stair-step decline that saw the market dip below $1 for the first time in 12 years, December as of this writing is back near $1.25 per pound.
The whipsaw-like movements that have accompanied these moves owe much to the "big money" that seems to permanently haunt all commodities futures these days. The funds have held record high short positions for much of the year, and as the end of October is their year-end for reporting purposes, many likely liquidated positions by having to buy into a market that had little in the way of eager sellers among producers, who for the most part make little – or even lose – on any coffee sold below a market level of $1.25.
This makes upward movements sharp and rapid in ascent. Differentials, especially for specialty coffees, have held firm or risen, adding to the cost this latest bump represents. It will be interesting to see where we go from here, as the last three times the market dipped below a dollar and held there, it stayed below a dollar for roughly a whopping five years on average.
This surprised me most when I looked at long-term charts. I have doubts we will see that again this time around – but never say never, as they say. In those last two past events, I recall it having quite a negative effect on operator profits and margins, as price-cutting competitors tend to go too far in discounting, and no one wins as costs remain in a tight, albeit low, range. For this reason alone, we should all hope for volatility and these bounces in pricing to continue, as harrowing as they can be for buyers.
» 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.
