Trading Jenga: The Coffee Conundrum
Coffee is an international market. Its 2015 coffee season benefited from widespread rain and increased harvests. Prices fell to their lowest since January 2014. London and New York Future contracts for Arabica and Robusta fell about 30 percent during a one-year period. Factors which impact coffee commodity pricing include delivery points, coffee grades, rainfall, sunshine, inflation, beverage consumption around the globe, shipping costs, and currency issues. Brazilian Coffee could increase 20 percent in 2016 as Brazilian growers expand the size of their coffee plantations and local rain increases crop harvests.
Where is the challenge to coffee at the present moment? Coffee prices reflect record-high commercial net long positions due to low inventories and uncertain Brazil and Vietnam coffee production levels. Have consumption patterns changed? Have tea and energy drinks lowered the long-term coffee commodity expectations? The coffee market continues to appear an expanding market with market penetration in Asia and India.
The bullish bet among coffee producers, roasters, and physical traders, who have held a consistent net short position for years, reflects growing expectations that the 23-month price low hit earlier this month may represent a bottom for the market, the importers said.
The currency spread between the US Dollar and other monetary currencies from Colombia, Brazil, Vietnam, Guatemala, and others impacts the bottom line in ways which collapse local markets. The financial side of the FOREX market and currency rates inflates or deflates profits of the growers. Vietnam coffee growers are usually small players without the means to hedge the currency portion of their income stream.
Coffee prices and the coffee market are not always liquid. The customs and regulations of this industry appear scant in smaller countries. The Vietnamese coffee market is the second largest grower behind Brazil. Vietnamese growers are storing coffee beans after harvest in their homes, bedrooms, and warehouses until the local coffee prices increase. This can degrade the quality of the coffee and introduce humidity, mold, aging, and rodents. It appears a very big problem if you consume this origin of coffee.
The level of stored coffee beans increased 600% from 2010 to 2015! This is scary. This can alter the coffee market in several ways including:
Stale coffee degrades the basis differential for the country storing the coffee prior to sale
It alters the percentage of world coffee for any given location and could alter purchasing practices
Who buys this old coffee? Does it contain mold? Is the correct crop harvest date given to the purchasing agents? If coffee is stored 2 or 3 years prior to sale and roasting, does this coffee taste horrific? The quality difference between coffee growers is large. It is similar to oil markets. The quality and delivery point greatly impact the commodity price.
The quality and location basis differentials will increase if these trends continue. There appears to be some very large trader in the market whose information is not readily visible. Is this Starbucks or Green Mountain?
How do coffee futures hold up against the physical coffee commodity trading markets? The coffee bean quality differs widely from Kona to Sumatra to Columbia to Organic Arabica. How is this run into the trading models and clearly portrayed? This is seldom the case in commodity markets, but tea and coffee commodity markets follow a different model and favor old style traders.
2015 Harvest Numbers for Coffee Growers (coffee bags weigh 132 lbs)
Colombia’s coffee production in the calendar year 2015 rose to a record 14.2 million bags.
Brazil the top grower of Arabica beans purchased by Starbucks Corp. and the second largest producer of Robusta. Growers may reap between 49.1 million and 51.9 million bags, up from 43.2 million bags in 2015.
Vietnam
Indonesia The global harvest will expand 7 percent to 152.8 million bags in 2015–2016. The provinces of Lampung, Bengkulu, and South Sumatra are the main Robusta producers. Coffee levels may increase 18 percent to 650,000 metric tons the world’s third-biggest producer of the Robusta variety contracted by Nestle SA, has a record crop after rains boosted yields. Is this premium Pacific Rim or lower quality?
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