Coffee is a ubiquitous beverage that many of us need to start our day. A dose of caffeine provides the jolt that pushes us off on a productive path. In my July 10 Barchart article on soft commodities, I highlighted ICE coffee futures’ 5.57% decline in Q2 2023 and the 3.77% decline over the first six months of this year. Nearby Arabica futures were at the $1.61 per pound level on June 30 and are virtually unchanged over the past weeks. Arabica coffee futures for September delivery have traded around the $1.60 pivot point since the end of the second quarter.
A consolidation pattern
While the continuous ICE Arabica coffee futures contract fell to a $1.4205 per pound low in January 2023, the most recent low in the active September contract was $1.5505 on July 18.
The six-month chart shows nearby Arabica coffee futures have been trading around the $1.60 pivot point since late June. Since June 26, ICE Arabica coffee futures have traded in a range from $1.5505 to $1.6830 per pound. At the $1.6150 level on August 8, the futures were neutral in a trendless trading pattern.
The trend since 2019 remains bullish
In April 2019, the coffee futures fell to 86.35 cents per pound, the lowest price since September 2005. While the coffee market has been volatile, the trend has been bullish over the past four years.
The twenty-year chart highlights the explosive over 200% rally from 86.35 cents to $2.6045 per pound. While the correction took coffee futures to a $1.4205 low in early 2023, the price recovered to over the $1.60 level as coffee prices consolidated at just below the midpoint of the four-year trading range. The overall long-term trend remains bullish in August 2023.
Robusta futures remain bullish
Arabica is the most popular coffee quality, but Robusta coffee beans make espressos and other coffee beverages with higher caffeine content. Brazil is the world’s leading Arabica coffee producer, while Vietnam has led the world in Robusta output.
The ICE Robusta coffee futures chart shows the rally from $1,073 in April 2020 to $2,976 per ton in June 2023. The most recent high was a record peak as Vietnamese production fell due to weather issues and because producers chose to plant other crops. At the $2,688 per ton level on August 8, Robusta futures remain close to the record high and put upward pressure on Arabica futures.
The case for an Arabica recovery to $2 per pound or higher
The following factors favor a challenge of the $2 per pound level in the nearby ICE Arabica coffee futures contracts:
- Price consolidation over the past months will eventually give way to a move to the up or downside. Given higher production costs, supply chain issues, and the uncertainty of the weather conditions in the leading growing countries, the odds favor higher prices.
- Robusta futures at near record highs support higher Arabica coffee futures prices.
- Coffee demand is inelastic, as consumers can absorb higher prices without curtailing consumption.
- The trend since 2019 remains bullish above the $1.4205 level, which now stands as a critical technical support level for the Arabica futures.
Meanwhile, the forward curve shows the market expects rising coffee prices over the coming months and years:
The Arabica futures curve displays a slight contango or a premium for deferred delivery months. While contango reflects equilibrium or short-term oversupply, the price level and higher future prices tell us the market expects prices to move higher out to July 2026 delivery.
A volatile commodity that requires risk-reward discipline
The 200% move from the 2019 low to the 2022 high exemplifies the extreme price variance in the coffee futures market. Weather-related issues or crop diseases can cause significant price moves.
I favor the upside in coffee, a member of the soft commodities sector. Over the past two years, coffee, sugar, cocoa, and cotton prices have rallied to multi-year highs, and frozen concentrated orange juice futures reached a record peak over the past weeks. The overall bullish trend in soft commodities suggests that coffee prices will recover and move toward the $2 per pound level.
Coffee is a highly volatile commodity, requiring careful attention to risk-reward dynamics on all risk positions. Since coffee can experience significant percentage moves on the up and downside, any long or short position requires a plan outlining a risk level that is a function of the expected reward. While adjusting the reward horizon if the price moves in the anticipated direction is appropriate, risk levels should be adjusted based on the market price not the execution price. If the price moves contrary to expectations, sticking to the original risk levels is prudent.
Soft commodities like coffee offer tremendous profit potentials, but risks are always a function of the potential for rewards. Discipline is critical for success in the coffee market.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
