Relief is at hand for coffee lovers who have been blighted by soaring prices over the past year. For that, they can thank favorable weather conditions in South America and weaker-than-expected demand growth.
“Without a weather event, prices are likely to fall,” said Carlos Mera, head of agricultural commodities market research at Rabobank in London.
He sees arabica beans – those used to make premium beers – possibly dropping below $2 a pound by the end of the year. That would be 12% below their recent price of $2.27.
Traders looking to take advantage of any declines should consider selling December-dated Arabica futures on the ICE futures exchange. Alternatively, they could short the
iPath Series B Bloomberg Coffee Sub-Index
(ticker: JO) exchange-traded note, which tracks the price of coffee. Short sellers borrow stocks and sell them, hoping the price will fall, so that repayment can be made with cheaper stocks.
Arabica bean prices have been on a rollercoaster ride over the past year. They peaked in early February at nearly $2.60 per pound, compared to less than $1.25 at the start of 2021. This volatility is likely to continue, although the main price trend remains down.
Commodity experts had predicted coffee demand would grow 3.5% this year, well above the current rate of 2%, Mera says. “Granted, we were expecting above-trend growth.”
Many factors are to blame for this.
The first is the war in Ukraine. “At the moment, we assume a 25% drop in demand for Russian coffee,” says a recent Rabobank report. However, the report adds that there is a lot of uncertainty, due to lack of data.
For obvious reasons, coffee exports from the European Union to Ukraine fell by 70% in March.
Lockdowns from the Covid-19 pandemic in many Chinese industrial centers are also dampening demand, which could fall by 10% or more in that country if its zero Covid policies continue until the end of the year. In the long term, China is seen as an important potential coffee market with an annual growth rate of around 10%. “Now we could see negative growth there,” Mera warns.
The supply of coffee beans is expected to put downward pressure on prices, mainly because the disastrous weather conditions that hit Brazil last year are unlikely to recur. The South American nation produces 39% of the world’s Arabica beans.
That said, the emotional scars of the Brazilian weather woes of 2021 remain in the minds of traders. “We had a frost alert last week, and coffee went from $2.12 to $2.26, due to market reaction,” says Jim Roemer, an agricultural expert who wrote the Weather newsletter. wealth. “It was a psychological reaction to what was going to happen in July and August [Brazil’s winter].”
These concerns will likely continue. But there’s not a strong chance that the Brazilian crop will be devastated in 2022. “The likelihood of two major frosts, especially during La Niña, and subsequent major frosts is very, very unlikely,” Roemer says.
La Niña is a cold weather system that forms off the equatorial coast of South America, affecting rainfall and temperatures around the world. “I see another cold snap in early June, but I don’t see a devastating freeze like we had last year,” Roemer said.
There are always considerable risks involved in investing in commodities. These risks are amplified when the result is partly dependent on the weather or, as with the Russian market, when there is a shortage of data. But the trades suggested above could make a bet worthwhile.