There was a time when a few key indicators controlled the direction of commodity prices. News agencies could regularly refer to fundamentals, major weather patterns and the like when discussing the daily movements of coffee prices. Those days, however, are long gone. Since pension and investment funds moved into commodity markets in the wake of the 9/11 terrorist attacks in the United States and the 2008 global financial crisis, coffee prices today seem far removed from these core fundamentals. Recent experience has shown that even core fundamentals – such as crop prospects in the world’s two largest producers Brazil and Vietnam – exert little influence on coffee prices. So the question then arises, what does affect prices? In today’s complex financial landscape, Global Coffee Review offers these top 10 trendsetters to consider when predicting the future of coffee prices. 1. The Global Economy
Above almost any other indicator, the sentiment of the global economy seems to have the greatest influence on the coffee market. Recent events have seen prices stay low, despite strong consumer demand across both consuming and producing countries. Traders and fund managers need to feel optimistic about the world economy, in order to buy enough coffee to boost prices. The global economy is seen as an “external factor” in affecting the direction of price movements. Other related factors include economic indicators like job figures, general consumer spending – and these days the debt crisis in the Euro-zone is a factor unto itself. 2. Brazil
As the world’s largest coffee producer, Brazil is – after the global economy – still the number one core fundamental indicator for coffee prices. As the 2013-14 coffee harvest gets underway, speculation about the crop’s impact on prices has grown. Industry officials in the South American giant say that the new crop is set to produce the biggest harvest Brazil has ever seen in an off-cycle. Forecasts vary from 47 to 53 million 60-kilogram bags, however that level of variance still leaves a lot to be determined. Prior to 2009, any predictions of Brazil’s harvest would immediately be able to move the market, but that effect has been reduced since funds have stepped up their participation. Other smaller producing nations have also stepped up production, helping make up a greater share of the pie. Coffee prices may rise on news of a Brazilian crop falling short of expectations. This, however, would need to be accompanied by other news seen as bullish to coffee. 3. Vietnam
In the past decade, Vietnam has consolidated its position as the world’s second largest coffee producing nation, and speculators and market players are today actively debating the size of Vietnam’s crop. Although some segments of the market remain confident that Vietnam will produce another bumper crop in the 2012-13 harvest, local evidence has been less convincing. The Vietnam Coffee and Cocoa Association (Vicofa) has pegged the 2012-13 harvest to fall below last year’s record output of 24 – 25 million bags. Some private exporters say that the current harvest will end between 10 – 15 per cent lower. Although a significant drop, these figures may not be enough to lead to a fall in prices. The negative outlook for Vietnam’s next 2013-14 harvest, however, is where prices could find some support. A two-month drought in February and March has been reported to already cause significant damage to flowering. 4. Coffee leaf rust outbreak in Central America
Production losses in Central America’s 2012-13 harvest are estimated to reach at least 2.5 million bags. However, with fundamentals having less of an impact on coffee prices in the modern market, the ensuing effect is less straight forward. Rodolfo Mora, a Coffee Trader in Central America, says that these loss figures are tricky, with the region still harvesting coffee as the market wants to see evidence of the losses and it wasn’t until February that reports on export figures started to show some decline. Guatemalan coffee exports in March, for instance, were down 17 per cent, while El Salvadoran coffee exports in the same month were down 15 per cent. Commodity Analyst Keith Flury, of the Dutch financial group Rabobank International, says that the region’s overall output is expected to drop 14 per cent in the next harvest, or the equivalent of 3.3 million bags because of “the worst case of roya [coffee leaf rust] in Central America and Mexico since 1976”. Other analysts agree, and say that coffee prices will eventually be affected. Christopher Narayanan, of the French financial services company Societe Generale, says the threat of rust fungus, if accompanied “by disappointment in one of the top producing countries” could provide a severe upset to prices. If the global coffee surplus turns out smaller than expected, producers will likely see a rebound in prices. Narayanan predicts that Arabica prices will hit average US$1.60 a pound in the last quarter of 2013. Arabica prices traded between US$1.32 – $1.40 a pound for most of March. 5. Colombia
After four years of bad weather complicating recovery efforts in Colombia, the Andean country has lost influence on global prices. In March this year, the International Coffee Organisation lowered the weighing of Colombian Milds in its Composite Indicator Price. Nevertheless, Colombia still has some influence. The downward trend in prices seen last year was in part supported by the belief that Colombia would see its 2012-13 harvest recover to double digits: 10 million bags. This, however, is becoming increasingly unlikely. Although coffee production in March was up, overall Colombian production in the past 12 months continues to linger at just above 8.2 million bags. As exports for the 2012-13 cycle will move into the last quarter starting in July, markets will be watching Colombia more closely. Many commodity analysts, including Societe Generale, still have their doubts. “The rate of production from Colombia still lags behind historical levels,” the group says, adding that the latest production numbers from Colombia “continue to show that the expected recovery this year is likely too optimistic”.
6. US financial news
As the world’s largest economy and top coffee importer, American fiscal health sits on its own as an indicator of coffee prices. Job creation and unemployment figures in the US affect the global economy, and are thus taken into account in predicting coffee prices. Positive news should be good for coffee prices, according to Jack Scoville, Senior Commodity Analyst at The Price Futures Group in Chicago. “The world economy continues to improve and we are definitively seeing it here in the US, so that is very positive to coffee,” he says. His predictions are that, in the short term, coffee prices are likely to remain between US$1.30 – $1.50 per pound. However, towards the third or fourth quarter, prices could find enough support to lift to US$1.70 per pound. 7. EuroZone debt news
This is another sensitive indicator to look out for. So far, bad news has not been very encouraging for coffee. Recent European economic troubles started out with ballooning debts in Greece, Ireland and Spain. Every time the European Union works out a new bailout package, it seems another country is in need of help. With Cyprus and Slovenia most recently joining the list of prospects, some analysts fear the worst is yet to come. Online financial service provider MarketWatch commented in mid-April that the recent crisis shows no sign of abating. “The Euro crisis has long since gone from being a currency and debt crisis to becoming a full-fledged economic crisis,” it said. “Now it is poised to become a political crisis as it destabilises governments throughout Europe.” Although coffee prices could rise even if the Euro crisis does not improve, any worsening of the economic outlook could send prices the other way. Albert Scalla, Senior Vice President of Miami-based INTL Hencorp Futures, predicted at a recent coffee conference in Central America that if the macro-economic outlook worsens, the market could drop to US$1.10 – $1.20 per pound. 8. China
As the world’s most populous country, high demand and consumption figures in China are good for almost every industry. Coffee is certainly no exception. China’s thirst for minerals and metals, grains, food items and electronics, helps global financial sentiment as a whole. 9. Stocks of green coffee
In addition to production and consumption, keeping an eye out on stocks of green coffee held by importing countries is a good idea. In mid-March, total stocks at ICE certified warehouses stood near two-year-highs at 2.7 million bags, but total US green stocks were near two-year-lows at just over 4.9 million bags. European green coffee stocks were at 9.76 million bags at the end of 2012, down 2.7 per cent on the year prior. Although much has been said about Brazil’s record crop, keeping an eye on stocks will be a good indicator on how much of a surplus this amounts to in the market. If certified stocks start coming down, this could trigger higher prices. Brian D. Wright, a professor at the University of California, Berkeley who has written extensively on volatility in agriculture and commodity markets, says that price spikes occur only when “stocks or use ratios are minimal” and the market is fragile. He argues that prices will only respond to fundamentals and move higher when both stock and production are low. 10. The Weather
Increasingly erratic weather due to climate change in producing countries remains a wildcard for coffee. Many analysts and exporters have expressed concern that although production figures remain high, that could change dramatically, especially if those changes hit Brazil. With limited stockpiles, the market is particularly vulnerable to major weather problems in any of the top 10 producing countries. Rabobank’s Flury says that the 2013-14 Arabica supply and demand outlook points to tighter fundamentals, due to lower off season yields and higher demand. With the world looking currently at a coffee deficit of around 1 million bags in the 2013-14 crop cycle, he says this could bring prices back to US$1.65 per pound in the last quarter of the year.