Coffee futures price: Low inventories provide floor despite positive Brazil crop news
Arabica coffee futures prices have continued to retreat to levels not seen in one year as a stronger US dollar and expectations of an improved harvest from Brazil, the world’s biggest coffee producer, weighed on the commodity’s price.
On the other hand, coffee inventories have continued to decrease, indicating tightness in supply.
Will the falling inventories stop coffee futures prices from dropping further?
Coffee futures explained
What are coffee futures? Let’s take a closer look at the commodities in question and find out where they’re traded and what affects their price.
There are two main futures contracts based on the two main coffee varieties: Arabica and Robusta.
It is important to distinguish between the prices for Arabica and Robusta spot contracts – contracts for the immediate delivery of the commodity – and futures prices, which “lock in” the price of the commodity for delivery at a later date.
The main coffee futures market is the the Intercontinental Exchange (ICE), where both varieties are traded via options and futures. Arabica coffee is also traded in futures contracts on the New York Mercantile Exchange (NYMEX), which is operated by the Chicago Mercantile Exchange (CME) Group.
Arabica, which accounts for 70% of the total global coffee trade, is the most popular coffee variety worldwide due to its complex flavours, smoother and less acidic taste. This type of coffee is preferred by global chains, such as Starbucks (SBUX) and Coca-Cola (KO) subsidiary Costa Coffee.
Robusta beans’ bitter and stronger taste is attributed to its higher caffeine content. This variety is used in the production of instant coffee, such as for the brand Maxwell House, owned by the Kraft Heinz (KHC) corporation.
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Coffee futures: Historical performance
Declining Brazilian coffee production in 2021 due to severe frost fuelled Arabica coffee prices at ICE to rally from the slump exhibited during the Covid-19 pandemic in 2020.
The South American country accounts for around 36% of global coffee production, according to Fitch Solutions. Brazil’s coffee production dropped nearly 17% during Marketing Year (June-July) 2021/2022 to 58.10 million 60-kg bags from the previous year, according to data from the US Department of Agriculture (USDA).
Arabica coffee futures at ICE briefly peaked to a 10-year high of $2.52 a pound in early December 2021, from a low of $0.95 in June 2020, according to Investing.com’s historical data. Arabica coffee prices gained 73% over 2021, from a drop of 1.33% in 2020.
Robusta coffee futures at ICE also rallied, briefly trading as high as $2,382 per tonne at the end of December 2021, rebounding from a low price of $1,109 in April 2020, according to Investing.com data. Robusta coffee futures rose 71% over 2021 after holding steady in 2020 and showing merely a 0.29% gain.
Coffee futures news
The Arabica coffee futures price rallied to a fresh 10-year high of around $2.60/lb on 9 February 2022, but it has fallen to below $2/lb since then due to the prospect of higher Brazilian output and the appreciation of the US dollar.
The USDA forecast in June that Brazil’s coffee production will rise to 64.3m 60-kg bags in MY 2022/2023 – an 11% increase from the last crop.
The US dollar has strengthened against other currencies as the US Federal Reserve has kept a hawkish monetary tightening policy to combat high inflation. The US Dollar Index (DXY) has gained 18% year-to-date (YTD), according to data from Investing.com.
However, falling inventories offered support for the price of coffee futures. The International Coffee Organization (ICO) reported that New York certified stocks decreased 37.2% in September from the previous month, closing in at 0.45 million bags. Robusta coffee stocks also dropped by 0.8% to 1.59m bags.
“The market thinks that coffee is in good supply worldwide. There is still a threat for a third year of La Nina which could negatively affect coffee production again next year but so far the crop conditions are called good,” according to Jack Scoville, head of research for coffee and other crops at Price Futures Group.
As of 18 October, Arabica futures were trading at $1.94/lb, a fall of nearly 13% YTD, according to Investing.com. The website’s data indicated that Robusta coffee futures have also fallen about 13% YTD.
Coffee futures forecast: 2022 predictions and beyond
As the US dollar could remain elevated and Brazil is set to ship more beans, let’s look into analysts’ coffee futures predictions.
In its coffee futures price forecast for 2022 dated 13 October, Fitch Solutions expected arabica coffee futures to average $2.15/lb in 2022 and $1.90/lb in 2023.
In the long term, the firm expected the coffee futures price to continue easing to $1.80 in 2024, $1.60 in 2025, and $1.50 in 2026.
TradingEconomics projected coffee futures price to trade at $1.91/lb by the end of this quarter and drop to $1.75 in 12 months’ time.
Algorithm-based price forecasting service Wallet Investor viewed coffee futures as a “very good long-term (1-year) investment”.
The service’s coffee futures price forecast for 2025 saw Arabica coffee futures rising to $3.50/lb in December 2025 and $4.28/lb in October 2027, from $2.16/lb in December 2022.
The bottom line
Bear in mind that Arabica futures price predictions from analysts and price forecasting services can be wrong.
Forecasts should not be used in place of your own research. Always conduct your own due diligence before investing. And never invest or trade with money you cannot afford to lose.
FAQs
Why are coffee futures so high?
According to the Financial Times, the price of coffee futures rallied in late 2021 as “companies and traders dashed to lock in supplies” as they contended with “shipping bottlenecks and a late-year rise in demand.” The price has since retreated slightly, but remained at elevated levels – close to $2/lb – due to short supply of the commodity worldwide.
Remember to always do your own due diligence before trading or investing.
What determines coffee futures prices?
As with all other assets, the prices of coffee futures are determined by global supply and demand. The recent rally in the price of coffee futures, for example, has been spurred by both a rise in demand and a potential shortage of global supply, indicated by low inventories.
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