08.07.2022 – No clear trend in coffee prices. Just as with other soft commodities, there is currently a clash between crop yields, rising inflation, the threat of recession, and demand picking up again after the Corona lockdowns. We shed light on the background.
The weekly chart illustrates the indecision in the market. Roughly speaking, the price oscillates between 260 and 200 US cents per pound. The interim bull market, which began after the Corona crisis, seems to have come to a halt for the time being.
Source: Bernstein Bank GmbH
Overall, the macroeconomic environment has recently been rather bearish again. This is because the outlook for the global harvest has improved. For example, in its outlook for the 2022/23 season at the end of June, the U.S. Department of Agriculture (USDA) cited an increase in production of 7.8 million bags year-on-year to around 175 million bags. At the same time, however, global demand would only pick up by 1.8 million 60-kilogram bags to 167 million. So we have a supply overhang.
Brazil decides
As recently as January, the coffee price had been trading at its highest level since 2011 as producers suffered from drought and frost. Brazil in particular, as the largest Arabica producer, was causing concern in the market – fears were rife that crops would be damaged on a large scale, which could influence prices upward for years to come. Arabica beans account for around 60 percent of global coffee production, and the price-determining market is the New York Mercantile Exchange. No wonder, since the world’s dominant coffee-drinking market is the USA.
Easing in Asia
In parallel, exports of the other major variety, Robusta, have eased again – more product is coming onto the market. Weeks ago, high freight rates and faltering trade in the wake of the Corona fallout had caused problems for Vietnam, the largest Robusta exporter. The same was true for India and Indonesia. Robusta is mainly traded on the Intercontinental Exchange in London.
Arabica beans tend to taste fruity, aromatic and less bitter. Robusta are more earthy or nutty. Both varieties influence each other. When the supply of one bean is too low, coffee roasters switch to the other variety.
Tug of war between bulls and bears
So is the coffee price breaking out downward or upward? Or will it stay with the sideways trend? You decide for yourself. In coffee, we find exactly the same price factors at work in all other soft commodities. The market is finding support in the economies that have reopened after Corona – but a new lockdown in the fall could put a damper on demand again. Furthermore, the rapid rise in inflation is bearish on the one hand. Families will save wherever they can – coffee is not a necessary good. Two cups instead of three in the morning are also enough.
At the same time, inflation is also bullish in the short term: farmers pass on the higher costs of fertilizer and transport to the product. The price rises – until demand is stifled. Supporting in the long term is the population explosion. So keep an eye on the real-time news – Bernstein Bank wishes successful trades and investments!
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