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Macro indicators are for a bull market in coffee futures

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While as a serious coffee drinker I may bemoan high coffee prices, from an investment point of view, this has been a very strong year for coffee futures. Drought and frosts during the last year’s growing season in Brazil marred the production in the world’s largest coffee-growing country, and have affected its exports throughout this year.

The La Nina weather conditions are expected to last over the coming quarter, and if the expected lower rainfall materialises Brazil’s drought conditions could become worse and affect the country’s coffee crop.

Other major coffee growers are also facing problems. Vietnam, the world’s largest producer of Robusta coffee, also expects a worse harvest this year, and according to Bloomberg, could potentially see its coffee reserves halve by the end of September. Robusta is the more tangy flavoured coffee, generally considered slightly lower quality than Arabica and typically trading at a discount. It is frequently used for instant coffee or blended in espressos.

In terms of prices, Arabica coffee futures on the ICE rose to a peak of $2.43 in late August and although they have regulated down since then, they remain significantly higher than in 2021. Robusta futures have risen more than 12% over the last two months to trade at $2.22.

High inflation versus low stocks

While there are some concerns over how the high inflationary environment will affect consumers’ devotion to coffee and the rising levels of demand over the last few years (excluding the period of the full-blown Covid pandemic), the current tightness in reserves and expected production issues make it unlikely that coffee prices will drop.

Coffee demand in Europe and the US suffered during the Covid lockdown in 2020 and 2021 but since then demand has bounced back in both regions. The percentage of Americans who have at least one cup of coffee per day has risen to 66% in July from 60% in January.

The current availability of coffee is at its lowest level since 2008 and market watchers estimate that the global supply during the next growing season – which starts in October – will be 40% lower than last year. The ICE exchange which collects the data on coffee inventories said that the levels are at a 23-year low of 712,817 bags.

ICO reports deficit forecast for coffee

In addition, the International Coffee Organization (ICO) has recently revised its forecasts for the 2022/23 coffee supply deficit of 3.13 million 60 kg bags, in contrast to its previous forecast which was a surplus of over 1.2 million bags.

With global consumption remaining strong the expected deficit could prove even higher. World coffee consumption is projected to grow by 3.3% to 170.3 million 60-kg bags in 2021/22 versus 164.9 million in the previous growing season.

While I may reconsider my second cup of coffee today, maybe on the grounds that the current state of the markets makes me already jittery enough even without the added caffeine, there is still a case to go long on coffee.

Explore WisdomTree Coffee ETFs

 

Product Name ISIN Exchange Ticker Listing Currency
WisdomTree Coffee
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KXP72 COFF USD
WisdomTree Coffee – EUR Daily Hedged
EQi
JE00B6TK3K31 ECOF EUR
WisdomTree Coffee 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | EQi
JE00B2NFTD12 LCFE USD
WisdomTree Coffee 3x Daily Leveraged
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | EQi
JE00BYQY3Z98 3CFL USD

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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