In a September 4 Barchart article, I wrote:
Coffee is a highly volatile soft commodity, with the leveraged and margined futures only exacerbating the risks. However, the potential for rewards is always a function of the risk, and coffee can offer significant price variance on a percentage basis. I favor buying ICE Arabica coffee futures on price weakness in the current environment. Supply tightness and high Robusta prices will likely limit the downside risk while the upside potential remains significant.
On September 4, nearby Robust futures were at the $2,712 per ton level, and Arabica futures were trading at $1.5190 per pound. Robusta coffee’s price has dropped significantly since early September, while Arabica prices were slightly lower on October 13.
Robusta drops
After reaching a record $2,976 per ton high in June 2023, Robusta coffee futures corrected lower.
As the chart shows, at the $2,388 per ton level on October 13, nearby November Robusta coffee futures have declined by 19.8%.
Arabica sits near the lows but has been steady
The high in the nearby Arabica coffee futures chart shows after reaching the highest price since 2011 at $2.6045 per pound in February 2022, the price corrected 45.5% to a $1.4205 low in January 2023. At the $1.55 level on October 13, December Arabica coffee futures remain closer to the January low than the 2022 high.
As the chart highlights, while coffee futures remain near the low, they have held the January bottom throughout 2023.
The bullish factorsThe bullish factors impacting Robusta and Arabica coffee futures are:
- Worldwide inflation has increased production costs for all commodities over the past years.
- Global coffee inventories remain tight in 2023. Global supply-demand fundamentals mostly favor higher prices.
- The Brazilian real has been trending slightly higher over the past years. A stronger real versus the U.S. dollar is bullish for coffee prices as local production costs in the world’s leading coffee-producing country, Brazil, are in the Brazilian real.
While Robusta prices reached a record high in 2023, Arabica prices have been trading higher over the past years.
The long-term chart shows higher lows since 2022.
The bearish factors
The factors weighing on coffee prices in October 2023 are:
- Rising U.S. interest rates since the 2020 lows and a stronger U.S. dollar over the past weeks are bearish for commodity prices, and coffee is no exception.
- Since the June high, the short-term Robusta trend turned bearish. Technically, Arabica futures reached a low in early 2023, but the chances of a lower low remain high, with the price not far above that bottom.
- Higher prices tend to cause the demand to decline. Lower consumer demand at higher prices is bearish for coffee and other commodities.
- Higher coffee prices lead to increased output, weighing on prices.
Meanwhile, bull or bear markets tend to move to extremes on the up and downside. Coffee is a highly volatile commodity as the weather and crop diseases can impact prices.
Futures are the only option- Trade with a plan
Volatility is a paradise for traders seeking high price variance. Coffee’s historical volatility makes it an excellent candidate for traders with an increased risk tolerance. The futures market is the only route for a long or short position in Robusta or Arabica coffee. Futures involve original and maintenance margins and significant leverage. Therefore, any risk position requires a plan to protect capital.
When prices move contrary, stick to the risk levels with stops so that a small loss does not become catastrophic. When prices move in the anticipated direction, adjust risk-reward dynamics based on the current market, not the original execution prices. Therefore, moving stops and profit targets on profitable positions is acceptable, while moving them on losers is not.
Coffee can experience wild price swings. Arabica prices rose from below 90 cents per pound in 2019 to over $2.60 per pound in 2022 before correcting below the $1.60 level in 2023. Time will tell if the Arabica futures bottomed at the $1.4205 level. The extended correction could be building steam for a significant move higher or lower over the coming weeks and months.
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.
