Coffee Makes A Move; Prices Close At Highest Levels Since 2017

Coffee cherries growing on coffee tree. Concerns about coffee production around the world have … [+]

Coffee prices rise on weather concerns, but total global growth in coffee production may still exceed growth in demand this coffee season. Caution is warranted.

Our last look at coffee in late December 2020 highlighted coffee market strength due to weather concerns in Vietnam, where it was too wet during harvest, and in Brazil, where it was too dry during the critical flowering period that occurs early in the coffee growing season. Coffee prices at year end were about ten percent off their 2020 highs after an impressive 35 percent late year rally.

February 2021 is ending with coffee prices above the highest levels reached in 2020, indeed at the highest level in years, because Vietnam ended up with a lower 2020/21 harvest than expected and there was apparently some failed flowering that occurred in Southern Brazil, which will possibly negatively affect the coming crop. Not all of this is completely reflected yet in official government reports by the USDA or by the International Coffee Association (ICO), but private traders and analysts are anticipating some level of decrease in the global coffee surplus that both the USDA and the ICO had projected in their most recent official estimates.

Brazilian coffee production had a record year in the 2020/21 season, but recent estimates by private coffee industry analysts are anticipating reduced Brazilian coffee production for the current crop year, which is supporting prices. Additionally, there are some weather concerns having to do with La Nina, a weather phenomenon that can affect coffee production in certain areas around the globe. Some commodity weather analysts also fear a frost event in Brazil which, if realized, would generally happen in July or August, causing coffee prices to rocket higher if history is any guide.


But caution is warranted for coffee bulls right now. Multiple weather agencies that track La Nina are forecasting a better than 50 percent chance that La Nina will weaken substantially in the coming months, which could lessen any negative weather impacts on global crops, including coffee. In addition, predicting a Brazilian frost event months in advance is, well, an inexact science to say the least.

Now that coffee prices are pushing against major historical resistance levels it will take definitive news to quickly push prices higher, a more likely scenario is that prices level off and trade in an elevated range for a while.

It is worth noting that coffee demand, while bound to rise as COVID restrictions are loosened, still may not rise enough to absorb what could end up being a global coffee surplus. Until official estimates change, market prices will reveal the true state of the global supply/demand picture long before the USDA and the ICO confirm and report the same.

There is no doubt the coffee markets are unsettled right now, and prices, should they push higher from here without a pullback, will confirm if there are significant production problems brewing around the globe. But it s entirely possible that the strong uptrend that has developed in coffee may take a break at current prices; it will continue only if the coffee crop can’t keep up with demand as we enter the post-COVID recovery that is already underway.

I am a commodities focused entrepreneur with over three decades of experience in physical and derivative energy and agricultural commodity markets. Opinions expressed are