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Coffee prices are volatile at the best of times, but with the US Department of Agriculture (USDA) forecasting rising global consumption and a decline in world coffee production for 2021/22, should we expect further price swings in this soft commodity?

In terms of returns, this year coffee prices are up 27%. However, over the last year, coffee prices, and by this we mean Arabica not Robusta, have ranged from 98.6 cents per pound to an almost five-year high of 161.8 cents at the beginning of June. The weak performance in 2020 was mainly because of the drop in demand due to Covid-19. However, negative annual returns for coffee prices are not unknown. For instance, coffee produced negative returns in 2018 (-19%), 2017 (-8%) and in 2015 (-24%).

Coffee, one of the most highly traded commodities, comes in two grades: Arabica and Robusta. The coffee traded on The ICE Exchange (Coffee C Contract) which is the main futures market for coffee, is Arabica. While Robusta, which comes from Vietnam does have an impact on global supply and prices, it is the Arabica prices that are the most often quoted. The Arabica prices are governed by volumes coming from Brazil because it has 44% of the industry, according to the latest USDA estimates.

Weaker harvest fears mean higher prices

While prices dropped back again this month because of rainfall in Brazil after a six-month drought Aneeka Gupta, equity and commodity strategist at WisdomTree which launched a coffee ETC in 2007, believes that coffee prices are set to hold up. “We have seen a small dip in prices which started towards the end of May up to mid-June, from 162 to 150 cents per pound owing to the long-awaited rainfall but coffee prices have regained those losses amid concerns over forecasts for frosts in Brazil.”

This is partly because there are still concerns over the 2021/22 harvest – the latest news is that there is frost affecting the crop in Brazil which could lead to a weaker harvest and higher prices. Essentially, coffee, a sensitive plant, requires a sweet spot between hot and cool weather along with favourable rainfall. In addition, Brazil’s Arabica trees are entering the off-year of the biennial production cycle which means a lower harvest next year. Meanwhile the USDA is forecasting a reduction of 11 million bags from the previous year to 164.8 million bags.

A stronger Brazilian Real and better GDP than expected could also impact favourably on coffee prices. There have also been supply interruptions in Colombia, another major coffee producer, because of civil unrest.

Expect more volatility

Despite coffee prices trending higher since June 2019 (as measured by the International Coffee Organization (ICO) monthly composite price index), we should expect continued volatility.

“The trajectory ahead will be volatile because a lot of the upside we have seen so far is predicated on the weaker supply outlook for the current crop year owing to persistent dry weather conditions since October 2020,” says Gupta. The cold weather temperatures on the way are likely to complicate the outlook for coffee supply. Frosts in Brazil do not affect the crop being harvested at the time of the frost, they tend to affect the production of the following year’s crop. “If the frost conditions in the south and southeast areas in Brazil continue to persist, we could see prices go higher but if the impact of the frost is short-lived, then a lot of the upside that we have seen will come off.”

Coffee trading fundamentals

For investors, Gupta gives some advice to those looking to buy coffee as a commodity. “Apart from keeping a close eye on the weather, there are two other critical factors. First, check where you are in terms of the supply cycle and second, keep an eye on what the Brazilian Real is doing. If the Real is weak, the Brazilian producers will try and sell more coffee in the international markets, thereby negatively impacting coffee prices. If the Real is strong, it erodes their incentive to sell in the international markets as their revenue is less valuable in dollar terms.”

Explore Coffee ETFs

Product NameISINExchange TickerListing Currency
WisdomTree Coffee
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | Charles Stanley Direct | EQi
GB00B15KXP72COFFUSD
WisdomTree Coffee – EUR Daily Hedged
EQi
JE00B6TK3K31ECOFEUR
WisdomTree Coffee 2x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00B2NFTD12LCFEUSD
WisdomTree Coffee 3x Daily Leveraged
Hargreaves Lansdown | Interactive Investor | AJ Bell Youinvest | EQi
JE00BYQY3Z983CFLUSD

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

Philippa Aylmer

Philippa Aylmer

Philippa Aylmer is a freelance writer within the investment management sector.

She began her career in the late 90s writing about emerging markets for the Euromoney titles while based in Pakistan. Since then, she has covered hedge funds, ETFs, wealth management and fintech.

As well as news, on the client side, Philippa advises on media relations and editorial strategy, writing about the topical and technical issues of investment management

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