Strength remains in equity markets

Arabica coffee prices have risen since our last report on the commodity in August 2023. Since bottoming out in October, Arabica has been on an upward trend, gaining around 34% from low-to-high. Traders should be able to use swing trading to capitalise on the bounce we expect to see in the coming months.

Several factors have contributed to Arabica’s upward momentum, including particularly dry conditions in Brazil’s major growing regions. As mentioned by meterology company Somar Meterologia, the Minas Gerais region, home to 30% of the arabica crop in Brazil, received only 49% of the rainfall it gets on average. Furthermore, prices have been driven up by falling demand for Robusta coffee. Key exporters, such as Vietnam, have been forced to reroute shipments owing to the conflict in and around the Red Sea, forcing ships to go around Africa instead. Consequently, shipment rates have gone up, pushing importers to look elsewhere. While the effects of the above have been negative for the supply, demand has remained solid and sloping upward.

Looking ahead, Brazil is in the wet period (December to April) meaning that for the planted coffee beans it is important that the weather improves and percipitation increases. Should the current dry spell continue it should have a bullish effect on coffee prices. However, too much rain, a risk due to the El-Niño weather event, would instead harm yields. Alas, a return to average percipitaion is what would allow yields to increase towards their estimated targets. The same applies to Brazil’s neighbour and second largest producer, Colombia. Seeing as the current weather is unseasonably dry in spite of El-Niño, it could be argued that it is more likely that coming months will see an increase in percipitation, causing a negative price pressure.

Robusta coffee from Vietnam on the other hand is more dependent on the Red Sea conflict. A ceasefire, or some other solution that would stamp out risk of attacks on global shipping, would quickly deflate the ballooned price of Robusta. However, should things escalate further it is likely that Robusta prices would skew up even further, indirectly pushing coffee importers toward Arabica and Robusta grown in South America. At the time of writing the conflict in Gaza and the Middle East appears to be in a state of escalation rather than de-escalation, in turn pointing to prices remaining higher for longer.

Finally, Brazilian coffee beans have been stored locally rather than exported to a greater extent than is considered normal. As consulting firm Safras & Mercado points out, not only beans from 2023, but even from 2022. Although there are many reasons for this phenomenon, one on the producer side is a lack of containers, while one on the demand side is a change in the pace of imports in Europe. Taking this stock surplus into account, the updated USDA Foreign Agriculture Service (FAS) estimate of 44.9 million bags (+12.8% y/y) produced by Brazil in 2023/2024 should put downward pressure on the Arabica price.

In summary, there are both variables pushing the price up and down. This should mean that the price will bounce around more than in the October-December period. Therefore, swing trading with volatility as a guide should be a prudent strategy in the coming months.

Coffee May 2024 (USD/Lbs), one-year daily chart