Coffee is certainly among the world’s most popular beverages but it doesn’t rank anywhere close to the top in terms of investor enthusiasm. Compared to other commodities like gold, silver and oil, coffee isn’t so widely followed. But people who invested in coffee in 2020 or earlier are sitting on a profit as coffee prices are trading at their best levels since 2015.
Let’s take a look at the coffee market to better understand the recent momentum and if it’s worth buying coffee at current levels.
Coffee as a financial instrument
Investors can buy and sell coffee via a futures exchange. Coffee contracts trade on the CME Group. Each futures contract represents 37,500lbs. Contracts are priced per pound. If coffee futures trade at $1 a pound, the full value of a contract is $37,500.
Contract for difference (CFD) platforms such as Capital.com allow you to speculate on commodities and other instruments. Instead of buying an expensive futures contract outright, investors trade a CFD, which gains or losses in value based on the movement of the underlying asset – in this case, coffee prices.
CFD brokers are known for offering leverage so investors can gain better exposure to commodities by putting up less capital. Note that leverage can also amplify your losses if the market goes against you.
Trade US Coffee Arabica Spot CFD
While there are two types of coffee, Robusta and Arabica, Arabica coffee beans account for 75 per cent of global production. Arabica trades at a premium price versus Robusta. Key coffee giants like Kraft, Procter & Gamble, Nestle, and Sara Lee acquire nearly half of all coffee production for use in their coffee brands.
Coffee beans grow on small trees, and it’s vital they do so under optimum weather conditions. Poor weather can affect the entire global market.
Brazil is among the largest coffee producers, and under normal conditions produces nearly 40% of the world’s coffee. Brazil, Vietnam, Columbia, Indonesia, and Ethiopia account for roughly three-quarters of the world’s coffee production.
Coffee price forecast depends on Brazil drought
Coffee is far from the only commodity to experience notable moves higher over the past year. The coffee price news and analysis coverage by most media outlets isn’t anywhere close to as thorough as for gold or oil.
These commodities have more observable catalysts for growth that are easier for novice investors to invest in. For example, the case for upside in gold is based on inflationary concerns, while oil prices are correlated to the outcome of the OPEC+ meeting.
So what has been driving the coffee price outlook and trend? Perhaps the most notable factor is the ongoing drought in Brazil. Reports of a devastating drought started making headlines in late 2020.
The US Department of Agriculture said in a June 2021 report that world coffee production for 2021/22 is forecast to be down 11 million bags to 164.8 million, mostly due to weather issues in Brazil.
There appears to be no near-term solution to the drought in Brazil, which would typically bode well for the coffee price forecast through 2023. Commerzbank's agricultural analyst, Dr. Michaela Helbing-Kuhl, said that if the drought continues until just August its impact could be felt into the 2023 crop season.
Nevertheless, traders and investors are wondering if coffee’s recent momentum already prices in a continued drought or if a bullish coffee price prediction can still be justified.
Coffee price forecast: evaluating key levels
Coffee entered July trading near the $1.54 a pound level. Key support and resistance levels on the coffee chart are:
This isn’t to say that coffee prices can’t trade beyond these levels. In fact, coffee traded below $1 per pound as recently as 2020 and above $3.00 per pound in 2011. Going further back shows coffee prices last traded above $3 in 1997 after averaging $0.6858 a pound a few years earlier in 1993.
While it may be difficult to model a coffee price forecast a couple of years from now as it’s dependent on weather trends, it is a bit easier to evaluate the short-term trend.
And this short-term rally first appeared in the coffee charts in July 2020, when the price of coffee broke above its 20-day moving average. Charts show coffee breaking above its moving average in April 2021 near $1.30 and momentum carrying it above $1.60 a few months later.
The price of coffee very quickly peaked at $1.65 on 1 June 2021, a level not seen since October 2016, and went on to trade below the moving average, where it stands in early July. On its own, this signals a bearish sentiment on coffee prices but we need to look at other indicators before jumping to any conclusions.
The relative strength index (RSI) reached overbought territory on three recent occasions, the most recent was around April. Fast forward to early July and the RSI stands at around 50, which is pretty much in the middle of the indicator’s range, so this may not offer any additional answers.
What’s next for the coffee price forecast?
Investors are left with three options. Short coffee, go long on coffee or wait until the picture gets clearer.
The case for shorting coffee is based on the belief that the market has already priced in a continued drought and its decline from around $1.65 to current levels is just the beginning of a prolonged weakness.
If this is the case, investors should consider setting a stop loss above $1.65, say at $1.70. If coffee successfully breaks above the $1.65 resistance level, it could be a sign that shorts are on the wrong side of the trade.
But the past few days have shown buyers trying to push coffee prices notably above the $1.50 level. Coupled with the fact that coffee prices are notably higher than where they were in late 2020, one would assume the rally still has some legs left.
In this case, a stop loss at $1.45 or $1.37 is appropriate as a fall below the support level indicates the rally may be done.
Frequently Asked Questions
Although coffee is not on the list of top 5 most-traded commodities, it could also bring attractive trading opportunities. Conduct your own research and consider trading coffee with contracts for difference. CFDs allow you to benefit from price fluctuation, regardless of the market’s direction. Open a long position, if you believe the coffee price will go up, or a short one, if you think it will go down.
Coffee prices have been moving up sharply since mid-to-late 2020, reaching its multi-year high of $1.65 in June 2021. Consider making your own robusta coffee price forecast and arabica coffee price forecast to spot the best levels for potentially profitable trades. Never forget that markets can go against you.
Weather is among the more notable variables impacting the price of coffee. Other factors include demand growth across the world. For example, coffee chain giant Starbucks expects to add 20,000 new stores by 2030, which would bring its total store count to 55,000 units. If the coffee chain sees success in new markets, the price of coffee could see gains.