Coffee Talk

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Prices could rebound to $1.20 over the course of the year ‘without breaking a sweat’: analyst

https://www.marketwatch.com/story/coffee-futures-may-jump-over-20-by-year-end-with-global-surplus-expected-to-turn-into-a-deficit-2019-03-08

AFP/Getty Images
Coffee futures may see a significant rise this year with a potential deficit in global coffee supplies
Author photo
By

MYRA
P. SAEFONG
MARKETS/COMMODITIES REPORTER
Coffee has fallen below a dollar a pound to trade close to its lowest level in more than a decade, but a global glut that pushed prices down for the past two years may finally come to an end in 2019.

“The coffee market is fighting a war on a few different fronts at the moment,” says John Caruso, senior market strategist at RJO Futures. Brazil’s 2018 bumper crop, which produced a record 62 million 60 kilogram bags of Arabica and Robusta coffee, has pushed prices to multiyear lows—well below the cost of production for most farmers, he says.

Futures prices US:KCK9 settled at 96.80 cents a pound on Feb. 26 on the ICE Futures U.S. exchange. That was the lowest finish for a most-active contract since September, when prices hit a daily settlement of 95.85 cents—the lowest since late July 2006. Prices ended the past two years with a loss and, at 98.50 cents on Thursday, were nearly 4% lower year to date.

For now, “favorable near-term weather for what is expected to be an ‘off year’ for coffee production has put a damper on prices to start out 2019,” says Caruso. After a big production year, coffee trees produce a bit less the following year as they recover. “The slump in the Brazilian real versus the [U.S. dollar] has also put pressure on the market, as the two are highly correlated,” he says. Coffee is globally priced in dollars. When the real weakens against the dollar, that encourages Brazilian farmers to export more coffee to the world market, he says. Brazil is the world’s largest coffee producer.

Global commodities brokerage Marex Spectron estimates total global coffee supplies at 172.3 million bags for the 2018-19 marketing year, with demand estimated at 164.4 million. That points to a surplus of 7.9 million bags. An early global output estimate from Marex shows a decline to 166.9 million bags and a rise in demand to 168.1 million for 2019-20—a supply deficit of 1.2 million bags. Marex Spectron analysts also point out that “underlying demand remains healthy, growing at 2% to 2.5% per annum.” Current prices are below the cost of production for many growers “washed,” or wet processed, Arabica coffee, which will “have an impact on production levels.”

Caruso says the cost of production for most farmers stands at $1.20 to $1.50, so with prices at sub-$1 levels, he also sees a possible supply deficit on deck. “I love coffee from a value standpoint,” he says. “We think that any little catalyst—whether it be weather related, currency related, or even short covering from its massive net speculative short position of 63,000 contracts, could create a buying spree for value hunters.” Prices could rebound to $1.20 over the course of the year “without breaking a sweat,” he says.

Prices may still have room to drop further, however, notes Jack Scoville, senior market analyst at Price Futures Group. He see prices possibly falling to lower-90-cent or upper-80-cent levels by midsummer. “But then we should start to recover” with the threat of reduced production creating at least a short covering rally. Price increases are likely to “eventually” be passed on to consumers, though they “rarely have an immediate effect,” says Caruso. Worldwide coffee consumption is rising, and there’s potential for a supply deficit by year-end, so a “price bump in your $3 morning coffee would be on the way.”

For investors, Caruso says he likes the ICE traded futures contract, the world benchmark for Arabica coffee. Investors may also consider the iPath Series B Bloomberg Coffee Subindex Total Return exchange-traded note JO, +3.77% and the iPath Pure Beta Coffee ETN.