Coffee Has Broken Out. Is The Rally Sustainable?

By: Spencer Israel

There’s an aroma of change in the coffee market.

Continuous coffee futures on the Intercontinental Exchange have shot up over 30% in the last six weeks to a two-year high, a dramatic move for a commodity in the midst of a long-term downtrend.

Likewise, the price of arabica coffee beans, the more popular of the two major coffee varieties (the other being robusta), has risen from $0.93 per pound in October to over $1.20 in December, as worries about production from Latin America have swept through the market.

This sentiment is a far cry from April, when concerns about Brazil’s weakening currency drove arabica futures to their lowest level in 13 years.

Rumors of slowing production began swirling in November when, according to the Wall Street Journal, traders became concerned about dry conditions in Brazil and Honduras, the world’s first and third-largest producers of arabica respectively. Now, there’s data to back that up.

According to data from the International Coffee Association released on Dec. 3, global October coffee exports fell -13% year-over-year to 8.91 million bags. The organization is now forecasting a global coffee supply drop of 502,000 bags in the 2019-20 season compared to a 3.7 million bag gain in 2018-19.

In Brazil specifically, November coffee exports fell -0.8% month-over-month and -15.4% year-over-year to 3.293 million bags, according to Brazil’s Trade Ministry. Meanwhile, arabica inventories tracked by the Intercontinental Exchange fell to a 16-month low of 2.056 million bags on Dec. 3, according to cmdtyNewswires.

All of this comes against a backdrop of continually rising demand. Global arabica consumption is expected to top 98 million bags in the 2019-20 season, according to Rabobank, which would be a record for the fifth straight year.

Despite the short-term squeeze higher, however, experts are still preaching caution. It’s unlikely, they say, that the market will experience a prolonged coffee supply shortage. But that hasn’t stopped bearish traders from fleeing in the interim. According to the CFTC, investors reduced their short positions in coffee to 47,899 contracts in the week through Nov. 19—the market’s smallest net short position since July.

Just like the beverage, the trade in coffee, it seems, is hot—at least for now.

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