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Reuters featured an interview this morning with a 62 year old truck driver in Brazil who had seen snow fall in his part of the country for the first time. While the unusual weather phenomenon was exciting for Brazilians, it was bad news for coffee planters in one of the biggest producers of coffee.

A polar air mass is currently moving across Brazil and threatening crops in strategic agricultural regions like Mato Grosso do Sul and Sao Paolo. Minas Gerais which is a major sugar producing region, could also see a taste of the cold weather today.

Short term sell off in coffee futures market

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Coffee futures prices have actually sold off in the last few days, taking some steam out of what was already a bull market in the commodity. September coffee futures have hit highs of over 210c / lb in recent days but have been dropping since then towards the 188 level. The implications of polar conditions in Brazil have yet to be fully digested by the market, we suspect.

Brazil is by far the largest producer of coffee in the world. By some estimates it accounts for over 30% of global coffee production. Any major disruption to the coffee harvest will impact coffee prices in a big way.

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It may be that some traders feel the bull run has reached its peak, however, and that recent prices have simply been unrealistic. This would explain some of the profit taking we have seen in the last few sessions.

Coffee prices have been reflected in the ETF space, where WisdomTree’s coffee ETF (LSE:COFF) saw a jump from $0.97 to $1.28 in recent days. The ETF has over $80m in assets under management and a tracking error of 1.38%., according to TrackInsight data. At time of writing it was trading at $1.21.

Coffee futures prices remain volatile

As we noted in our analysis on the coffee market in June, it remains fairly volatile. We have already seen drought in Brazil and the impact of some colder weather feeding into coffee prices, but there have been some big swings.

Aneeka Gupta, commodities strategist at WisdomTree, said back in June that if frost – and now snow – conditions prevail, this could provide a sustained cushion for coffee prices.

The cold weather in Brazil and its actual impact on the harvest may take a while to digest. We remain slightly cautious about the high prices in the coffee market right now, just because we consider it may be over-priced and that some form of correction is in order. But intelligence coming in from plantations in Brazil, especially in the important coffee growing area of Minas Gerais, which produces about 70% of Brazil’s annual harvest, indicates that severe damage is already being wrought.

Frost and snow will have a very damaging effect on plants, acting as a defoliant, and killing any flowers. In particular, it is killing younger coffee plants which will be important for future harvests.

The key factor now for coffee traders is working out where the real value of the market is. There is obvious slippage in futures prices right now, with much of the damage potentially already being priced in during trading over the last 10 days or so.


Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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