STRATEGIC PARTNERS
As of this writing we sit comfortably below $1 on coffee futures for the May position. We've been below $1 for the front month position for some time now and although I wrote on it last September, it bears repeating that going out too far may not be prudent until such time as we see a strong reversal in pricing. I've noted before that the last two times coffee found itself below $1, that level remained for years, the last time being from 2000 until the beginning of 2005. I get arguments over inflation an...
April 30, 2019 | Kevin Daw
As of this writing we sit comfortably below $1 on coffee futures for the May position. We've been below $1 for the front month position for some time now and although I wrote on it last September, it bears repeating that going out too far may not be prudent until such time as we see a strong reversal in pricing.
I've noted before that the last two times coffee found itself below $1, that level remained for years, the last time being from 2000 until the beginning of 2005. I get arguments over inflation and the fact that $1 today is worth X more, etc.; but markets are markets and they can remain inefficient, and far under- or over-valued for a great deal longer than one might believe or deem rational. I doubt we see another five-year print that stays below $1.
One fundamentally different aspect this time is technology and communication, both making trading and correcting of markets more efficient and far swifter than the pre-Internet days. One only has to watch the correlation between the value of big producer nations' currency to the U.S. dollar, the currency coffee is traded in, to see this in action. At these coffee future levels, one would be wise to not worry about whatever limited downside still remains in coffee prices and go out as long as allowed. I just wouldn't advise opening up personal commodity accounts for trading and bet the farm by buying up September '19 futures with your life savings. (Now that I've advised against that just watch a frost blow through Brazil come July).
As a coffee buyer, it is important I know what is happening on a macro level, and I keep finding myself in extended and fascinating discussions with green bean brokers on the market. They get the perspective from growers and exporters and hearing thoughts from "the other side of the table" is always helpful.
We know the "breakeven" number for growing coffee in many countries of note runs around $1.40 per pound. Some countries appear to not care how low the futures go, as they raise their differentials upward commensurate with any further drop in futures to keep at or near that $1.40 level.
We've seen differentials on all coffee we buy go up quite significantly of late, negating either some or all of the potential this low market held for all on the buy side. This is where the Internet has helped producers. They can better match their offerings with buyers, communicate with a far greater audience and demand a minimum or hold out for fairer skies as it were.
Colombia has of late actually talked of disassociating itself from the ICO and coffee futures altogether, having instead a base "take it or leave it" price not unlike Fairtrade. No one is sure how this Juan Valdexit will affect the overall market, or even the usage and volumes of Colombian coffees themselves. There was quite a mass exodus from Colombian use in blends several years ago, when a shortage in the Colombian crop saw prices for Excelsos eclipse $1 over the futures market at that time.
It never ceases to amuse me when I consider "Fairtrade" and how it is really only fair in one direction. It should be named, "At least breakeven trade for one side" as there is a cap on how low things can get ($1.40 is the lowest base used), but no cap to the upside. My own company, and I'm sure we were not alone, has had horrendous loss years where we were caught off guard by swift and gigantic upswings in coffee futures, but there was no recovery or help offered or given from these times. We must be sure to attempt to protect ourselves, and squirrel away capital from the good times as a buffer against the bad.
This does not mean I am callous about the plight of the farmers. Small growers are legion in many producing countries .and they are at the mercy of the local mill, their only feasible buyer for their crops. The Mill will tell the farmer what they are paying for coffee cherries, and there is no option in this for the farmer. I would like to envision altruistic Mill owners sharing the burden of a low coffee market, but I have doubts, so I get Fairtrade and their efforts but I again wish it were a two-way street.
Though we are seeing what appears to be an awesome market level for buyers, if history is any guide, we should actually cheer higher prices. Not so much because they help the sell side of the commodity market, but rather. that this saves OCS companies from the "Race to the bottom" price-slashing-to-gain market share tactics of some players. Nothing spells mediocrity in operating results quite like a low and stagnant market.
As always, may your cup runneth over, and the brew be exquisite.
