- Excess rain in Brazil is further reducing global coffee inventories.
- Vietnamese farmers are holding onto beans, keeping supplies tight.
- Weakening U.S. dollar will also help bolster coffee prices.
One of the few commodities to escape virtually unscathed from the coronavirus panic is coffee. Coffee prices have risen sharply in recent weeks, thanks largely to tightening supplies and short covering. In this report, we’ll review the key fundamental factors which point to coffee’s longer-term bull market remaining intact in the months ahead.
Since bottoming in early February, coffee futures prices on the ICE have risen by some 24%. This is in utter contrast to recent performances for other soft commodities in recent weeks, including sugar (down 13%), cocoa (down 10%) and cotton (down 14%). Of course, the biggest underperformer among major commodities since the coronavirus panic began in January has been crude oil (down 31%), which has weighed heavily on the broad natural resources market.
Yet despite the ill effects the virus has had on other markets, coffee prices have perked up in the face of diminished supplies. Excess rain in top producer Brazil has boosted prices for the widely-used arabica beans, allowing coffee to take first place among the world’s major commodities. The excess rain has caused fungal problems for coffee plants, resulting in less fruit from which to harvest beans.
What’s more, bean supplies are also lower globally, which is further serving to fuel the coffee price rally. According to a Bloomberg News report (via Yahoo Finance):
Arabica stockpiles held in port warehouses monitored by the ICE Futures U.S. exchange fell by 2,200 bags on Monday. Inventories held by Brazilian farmers are also low, while producers in Colombia and Honduras practically sold out after locking in prices in a late-2019 rally.
The weather-related, supply-induced shock in the global coffee market has also resulted in a substantial increase in volatility, however, as reflected in the following graph. It shows that 60-day volatility is at a multi-year high as the coffee market remains highly sensitive to the latest news headlines as much as other commodities. So while the fundamentals are supportive of higher prices, traders have arguably been over-reacted in the last few months to both favorable and unfavorable news for the commodity.
Source: Yahoo Finance
Further adding to coffee’s supply shortfall is the news that farmers in Vietnam and other coffee-growing countries plan to hold onto supplies in the wake of the lower prices that were seen during the previous years’ growing seasons. According to Reuters, “Traders and exporters in Vietnam have taken a step back from purchasing low-priced coffee beans from local farmers, while inventories begin to decline.”
It’s believed by industry exports that coffee prices will consequently increase in the coming months due to the lack of new supply from Southeast Asian growers. Indeed, low coffee prices prior to the start of the latest rally have resulted in crops reductions in some growing nations as much as 20%, according to the February 28 coffee and tea market report from S&D Coffee & Tea.
Turning our attention to the near-term outlook, coffee prices will also likely benefit from recent weakness in the U.S. dollar index (DXY). A weaker dollar is typically good news for commodities in general, but especially those which are already in a relative strength position versus other major commodities.
On a strategic note, I recently initiated a conservative long position in the iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO), which tracks the coffee futures price. I mentioned in my previous coffee report that a 2-day higher close above the 15-day moving average in JO would serve as an immediate-term (1-4 week) buy signal based on the rules of my technical trading discipline. I typically take some profit each time the ETF rallies 5%, and since the moving average breakout signal JO has gained 12%. I suggest using a price slightly under the 34.00 level as a stop-loss for trading positions on an intraday basis.
In conclusion, rain-induced supply reductions in Brazil and diminished inventories in other key growing regions of the world will likely result in global coffee prices remaining buoyant in the coming months. With these bullish supply factors in mind, commodity traders should expect to see higher coffee prices as 2020 progresses.
This article was written by
Analyst’s Disclosure: I am/we are long JO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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