Caffeine Rally: Prices Reach 1-1/2 Week Highs
As Thursday descended upon the trading floor, the May arabica coffee (KCK24) surged up +3.30 (+1.81%), with May ICE robusta coffee (RMK24) following suit, closing up +70 (+2.11%). This spike comes as a result of forecasts for scarce rain in Brazil’s coffee-growing zones in the coming week. Recent precipitation in Brazil has fallen short of the historical average, bolstering coffee prices with each parched day. Somar Meteorologia highlighted on Monday that the Minas Gerais region of Brazil witnessed a mere 6.6 mm of rainfall in the past week, merely 16% of its customary deluge. Being the home to around 30% of Brazil’s arabica crop, such weather discrepancies have a pronounced impact on the global coffee market.
Moving Acreage: The Dynamic of Surpluses and Deficits
Rabobank unveiled a bearish prophecy last Thursday, foretelling a looming coffee surplus of 4.5 million bags for the impending 2024-25 marketing year. This projection marks a significant escalation from the predicted surplus of 500,000 bags for 2023-24. Despite this gloomy outlook, Rabobank tempered its 2023-24 production forecast, slashing it by 3.9 million bags to 171.1 million bags. The adjustments were primarily attributed to downward revisions in production estimates for Indonesia and Honduras, offering a silver lining for the coffee market.
The coffee inventory landscape has recently undergone a transformation, rebounding from historically low levels. Robusta coffee inventories monitored by ICE tumbled to a record low of 1,958 lots on February 21, only to restore to a 7-week high of 2,894 lots by Thursday. Similarly, arabica coffee inventories plummeted to a 24-year nadir of 224,066 bags on November 30 but bounced back to an 8-1/2 month high of 560,627 bags by the end of the week.
Brewing Storms: El Nino and Its Grasp on Coffee Prices
This year’s El Nino weather phenomenon has cast a bullish spell on coffee prices. The looming El Nino pattern traditionally heralds heavy rains for Brazil and drought for India, a combination that spells trouble for coffee crop production. Ominous forecasts suggest that Vietnam’s coffee-growing regions might face drought towards the end of this year and the start of 2024. These portents stem from an official from Vietnam’s Institute of Meteorology, Hydrology, and Climate Change.
Conversely, the International Coffee Organization (ICO) countered this bullish narrative when it projected on December 5 that global coffee production for 2023/24 may escalate by +5.8% year-on-year, reaching 178 million bags. The ICO’s projections extend to global coffee consumption, anticipated to swell by +2.2% year-on-year to 177 million bags, resulting in a delicate balance and a potential 1 million bag surplus in the coffee universe.
USDA Insights: Planting Seeds of Coffee Production
The USDA’s Foreign Agriculture Service (FAS) released a comprehensive bioannually report on December 21, predicting that world coffee production in 2023/24 is poised to ascend by +4.2% year-on-year to 171.4 million bags. The report delineated a +10.7% surge in arabica production, reaching 97.3 million bags, alongside a -3.3% dip in robusta production to 74.1 million bags. The USDA’s FAS further prophesied that ending stocks for 2023/24 shall dwindle by -4.0% to 26.5 million bags from the previous year. Brazil’s 2023/24 arabica production is prophesied to soar by +12.8% year-on-year to 44.9 million bags, a result of burgeoning yields and expanded acreage under cultivation.
With the coffee market teetering on the edge of surplus and deficit, investors must navigate the caffeinated waters cautiously, as the elixir that sustains many can also prove a bitter brew in the intense commodity trading landscape.
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On the date of publication, Rich Asplund had no positions, directly or indirectly, in any of the securities mentioned in this article. All information provided serves purely informational purposes. To learn more, please refer to the Barchart Disclosure Policy.
The viewpoints conveyed in this article solely belong to the author and do not necessarily align with those of Nasdaq, Inc.
