Coffee Plunges into Agriculture Market, Could Become a Significant Market Player
In the world of commodities, the coffee futures market has been making headlines recently due to its bullish breakout. After some choppiness, the December coffee contract posted a bullish breakout with a new 4-week high beyond 302.55 the week of August 4.
This surge can be attributed to several factors. Speculative investors are increasingly active due to expectations of tighter supply, with the prospect of Brazilian tariffs and producers holding off sales supporting prices and fuelling speculative buying. Well-capitalized Brazilian coffee farmers are also holding onto their coffee stock, reducing available supply in the market and supporting higher prices.
Commercial farmers and roasters, on the other hand, have historically low levels of gross commercial long positions, implying that they will need to buy futures soon to cover demand. This anticipation supports bullish speculative positioning.
The tightening inventories of ICE Arabica and Robusta are another factor underpinning the bullish futures market. These have fallen to multi-month or even more than a year lows, signalling tighter supply.
Adverse weather conditions in Brazil's key coffee regions, such as drought in Minas Gerais and frost damage, have raised concerns about crop yields, supporting prices on the supply side despite strong harvest progress. The situation in Vietnam is also affecting coffee supplies.
When compared to the cattle market, coffee futures markets generally show stronger speculative interest and more pronounced price volatility due to direct supply shocks. The cattle market is influenced more by steady seasonal production and feed costs, while coffee markets react sharply to crop conditions and speculative flows based on global trade dynamics.
The Choice boxed beef reported price climbed to a new all-time high of $404.24 on Tuesday, while the Select boxed beef extended its strength to $377.14. It's important to note that the prices reported by USDA come with an automatic asterisk.
The US president's trade policy of tariffs is raising costs for the US to import coffee, which could further support prices. However, it's worth noting that the latest CFTC Commitments of Traders report showed a decrease in the noncommercial net-long futures position for coffee last Tuesday compared to the previous week.
Despite this decrease, if institutional investors continue to buy and the fundamentals remain bullish, the coffee market could experience further price increases similar to the cattle market. The December coffee contract, a Type 9 market, the most bullish type, has extended Wave 3 to a high of 352.05 this week, just beyond the upside target of 350.89 (61.8% Fibonacci retracement of the previous secondary downtrend).
In summary, the coffee market's bullish nature reflects a combination of speculative buying driven by expected producer behavior and roaster hedging needs, actual physical supply tightness (inventories and adverse weather), and lower commercial long positions that are expected to rise. This differs from the cattle market, where fundamentals are usually steadier and speculative influences somewhat less dominant in recent price moves.
[1] Source: Watson [2] Source: ICE Futures US [3] Source: Reuters [4] Source: Bloomberg [5] Source: Coffee Quality Institute
