Market Considerations and Analytics
Key Notes
The nearby ICE coffee futures market is very unstable. The price of coffee fell to under $1 per pound in June and July 2020 as the global pandemic engulfed markets for all asset classes, including coffee. Before the pandemic, moreover, coffee was under selling pressure, with the price dropping to 86.35 cents per pound in April 2019 because to an abundance of inventories. Coffee futures exchanged at a peak price of $2.6045 in February 2022. Coffee prices have more than triple since they peaked in April 2019, when they were at their lowest point as September 2005.
The price of coffee is attempting to find direction as 2023 approaches on the market. Coffee’s price on December 8 was well below technical support level of $1.76, which collapsed in October 2022, just below the midway of the 2019 bottom and the 2022 high.
The ICE coffee futures price is perfectly tracked by the iPath Series B Coffee Subindex TR ETN instrument (JO).
In July 2021, coffee futures broke past the barrier as a Brazilian frost raised supply issues. In February 2022, the price of coffee reached $2.6045 a pound, the highest point as September 2011, at which point coffee futures lost their positive turn.
From late February to mid-October 2022, when it broke down and went underneath the $1.76 mark, the price that had been technical barrier and became the important support threshold, coffee futures traded sporadically over $2 and generally below the $2.40 per pound level. March coffee futures hit a low point of $1.5045 on December 8 and closed at slightly under $1.5850 a pound.
The direction of least resistance for prices over the following months will be determined by the weather in the key growing regions for Arabica and Robusta beans, but currency fluctuations in the leading producer nations can also have an impact.
Source: elevencoffees.com
According to the picture, Brazil, the top producer, produces twice as much as Vietnam, and together Brazil and Vietnam outperform eight of the other top 10 providers.
The Intercontinental Exchange offers futures contracts for coffee (ICE). The Brazilian and Vietnamese cost of production are in national currencies, but the ICE contracts use the U.S. dollar as the pricing mechanism for coffee. Consequently, the exchange rate between the U.S. dollar and the Brazilian real and Vietnamese dong might affect prices. When the value of those currencies increases, cost of production climb as well, pushing coffee prices higher. Brazil and Vietnam can sell coffee for less as they decline since their production costs will be lower.
Brazil and the real are important variables that affect coffee prices.
Brazil just replaced President Bolsonaro with former President Lula, a left-leaning veteran union leader, to replace the business-friend clubby Bolsonaro. Brazil’s transition from capitalism to democratic socialism could lead to a choppy exchange rate between the Brazilian real and the US dollar.
Over the previous few months, the Brazilian real’s foreign exchange rate to the dollar has fluctuated between $0.18 and $0.20. Coffee may go higher if the $0.20 level is broken, while the soft commodity may decline if the $0.18 mark is crossed. The most important influence on prices in the upcoming months will be the weather in Brazil’s key growing regions.
The price movement may also be affected by Vietnam and the dong.
Vietnam is the world’s second-largest grower of coffee beans, producing the most Robusta. Robusta bean production is divided between Brazil (24.6%) and Vietnam (42.3%).
The strengthening of the dollar against the Vietnamese dong is one factor affecting coffee costs.
Vietnamese production expenses have decreased as a result of the recent strengthening of the dollar and weakening of the dong. The price of Robusta coffee beans is impacted by the dong’s declining purchasing power since producers can sell their products at cheaper dollar-based rates.
In 2023, coffee and it could go either direction.
Although the exchange rates in Brazil and Vietnam will affect product prices in 2023, the weather and crop yields will ultimately determine whether prices rise or fall. When the price of coffee went lower at slightly over $2.60 in 2022, it fell short of making a fourth journey to over $3 per pound. As it integrates and seeks supply and demand factors or events that may push it back to towards the recent peak or below under $1 per pound, the price is trading underneath the $1.60 mark as of late 2022.
The predicted pricing in late 2022 is a tossup at less than $1.60 a pound.
The biggest amount of inflation in decades is positive for the price of all commodities, including coffee. We might observe a resurgence in coffee prices in 2023 after they have fallen by $1 per pound from the high of February 2022. The neighboring ICE Arabica futures contract’s $1.76 per pound level is the first to keep an eye on. Over the years, the price has served as both a floor and a resistance level. Additionally, the median price for ICE coffee future for the previous years is $1.7340 a pound.
The futures and futures options on the Intercontinental Exchange are the quickest way to take a risk position in the coffee market. Market participants seeking coffee coverage have a selection between constrained, levered, and volatile futures and the iPath Series B Coffee Subindex TR ETN instrument (JO).
On December 8, JO managed $113.669 million in assets at a price of $45.30. JO charges a 0.45% maintenance fee and trades 61,516 shares on average each day. The March contract for coffee rose 13.2% from $1.5405 on November 17 to $1.7435 on December 1 during the most recent advance in the futures market for the commodity.
Under its technical resistance, coffee has corrected and is consolidating below the $1.60 mark. Inflation, weather-related pricing fluctuations, and currency differences are anticipated to persist in 2023.
