Hola Amigos! It took me a while to figure out this trading/blog situation, but here I go!
Coffee prices have been continuously falling since the 2011 almost-record prices. In the long run I expect prices to keep on falling due to high farming caused by the record prices just mentioned and great harvests in Brazil, Vietnam and most Latin American producing countries. Despite the announcement of measurements to control coffee prices made by Brazilian president Dilma Rouseff last month, prices have kept on falling due to high supply from the other regions mentioned.
Driven by the fast rising prices seen between 2009 and 2011, farmers increased cultivated area and yields, and will now face the consequences of oversupply (we should keep in mind that a coffee plants take from 2 to 4 years to start producing coffee!). Therefore all those millions of plants planted during high prices are now producing coffee and we are most likely heading to the traditional coffee low-price bottom-of-the-cycle as shown in graph 1. I do not expect coffee prices to hit all time lows but we will definitely get close to about 70-80 cents per pound sometime in the next two years.
Graph 1
In the short run I expect prices to fall further as this years great Brazilian harvest comes to an end in September and a great harvest is expected for this year in Vietnam and Latin America due to great weather, with particularly good rain in Vietnam. We might see several small bounces, but prices will most likely keep on falling as they’ve been doing for the past year (graph 2). It’s also important to know that this expectation of prices to keep falling has escalated the volume of coffee contracts negotiated. Speculators want to make money and roasters, traders and farmers to protect themselves, but of course there is huge uncertainty of how much and how fast will prices actually fall.
Graph 2
I’ve decided to stick to the idea that the price won’t bounce anytime soon and therefore I have shorted 7 contracts for March 2014 position (KCH14). They will start trading on Monday, as soon as the exchange is open. I hope this trade goes well and I don’t end up making some money!! In the end, as much analysis as you do, there are always unforeseen situations that might end up changing everything. Have a good weekend!
That first chart is remarkable – I did not realize coffee prices were that volatile. Looks like the cyclical downturn in coffee prices could go for another 2 years (I’m just eyeballing the last peak-to-trough which was ~ 4-5 years). Does coffee compete with any crops in particular for acreage?
Exactly! That is what I believe too. Coffee is not like grains, so if you plant a tree due to high current prices, you’ll only get coffee 2-4 years later, which explains a lot. Your question is good and I don’t really know the answer. In Mexico it competes with corn, beans and basic self consumption crops. But in Brazil and Vietnam (where the significant production is) I don’t know. I must look into it.