Crystal Balls & Brass Balls

Friends,

After 21 years of working in coffee I have finally figured out one of life’s absolute truths: You cannot predict the future. The other, less obvious truth that has revealed itself to me is that if you have enough money, you can most definitely influence the future. In the past few weeks, coffee prices have rallied up 80% on drought concerns in Brazil during the critical bean formation period prior to the harvest. We are in unchartered territory as drought has not occurred in this region at this time of year. Every passing dry day ratchets up the tension, as experts weigh in with opinions on root stress, bean development and plant health. A crop so large, over such a vast territory, is notoriously difficult to predict in size under normal weather conditions. Throw in weather patterns never before seen and the lottery draw of predicting is like rolling an eight sided dice.

We started with a broadly accepted crop of 60 million bags, or 40% of global coffee production (just to remind you of the size of the stakes). As with the Doomsday clock, this number is starting to tick backwards, taking us from a rotund, expected surplus of 6 million bags to a potential deficit of unknown size.

This ballooning risk brings the world’s biggest gamblers to our coffee table. Fund money is starting to sluice into the futures market, betting on the rumour by buying all they can; ready to sell the fact if the rain comes soon and in meaningful quantities. This is the money influencing our future. The ceiling of this market is a latent but potent number, yet to be discovered. The downside was seen at 104 when we were all still counting the future at 60 million bags. We have a floor, but no ceiling.

My other life lesson in recent months is that weather is not regional. It’s not even global. It is, at the very least, solar in its systems, probably intergalactic. I was recently in California where no significant rain has fallen in 14 months. At home in England, we have experienced more rain in the opening weeks of 2014 than has ever been documented since records began. (And we all know that the Brits love statistics. Why else would cricket possibly have been invented?)

Brazil is vast. This drought is not regional, it is national. Now that I know I cannot predict the future, I am going to concentrate on what I do know; and that is that our global industry is reliant on a single origin for 40% of its raw material. What I am wondering is how hard a lesson we are about to be given in risk diversification? All you Vietnam Robusta buyers out there…take heed.