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Coffee was one of the best-performing commodities in 2021 with futures hitting a ten-year high of almost $2.50 per pound in December. Although prices have corrected over the last few weeks and are trading at $2.37/lb the main supply issues still remain in place and are set to keep prices at a higher level in the course of this year.

Coffee harvests come in two-year cycles, one produces a lower crop and the next a higher crop. In Brazil, the world’s largest producer, the last harvest declined not only because it was the lower crop year but also because adverse weather added to the producers’ woes.

Total output in Brazil, which produces over 30% of the world’s coffee beans, fell by over a quarter in 2021. Add to this Covid-related supply chain issues, higher shipping costs and high fertilizer prices and there is a perfect storm leading to prices spiralling higher. In theory, this should mean that this year, the higher crop year for Brazil, should see a much stronger harvest but the La Nina weather phenomenon, which made its presence felt in 2021, could cause further problems for the upcoming crop.

“The arrival of the La Nina weather phenomenon, which tends to bring dryness in the southern part of South America for the second consecutive year, has also dampened the outlook for the coffee crop in the upcoming season,” says ETF fund manager Wisdom Tree in its recent analysis of the coffee market.

The United States Department of Agriculture (USDA) forecast in its December report that the global coffee production in 2021/2022 would decline by 8.5 million bags from the previous year to 167.5 million bags primarily because of Brazil’s lower output, down by 13.6 million bags to 56.3 million bags. At the same time, the USDA expects global consumption to rise by 1.8 million bags to 165 million, with demand growth being fuelled by coffee drinkers in the EU, the US and Brazil.

Lower production in Brazil combined with higher coffee prices will spur on producers in Colombia and Central America to ramp up production but given the nature of coffee growing (it takes a coffee plant three to four years before it starts bearing fruit) this process will take a few years before it starts making a difference.

Low exchange inventories

Trade COFF here
Hargreaves Lansdown . IG . SpreadEx

Given the supply and shipping issues that were present over the course of the last year, Arabica coffee stocks on the Intercontinental Exchange have dropped to a low of 1.51 million bags, down from 1.60 million at the start of December.

This level of inventories is below the two-, five- and ten-year average and means that if stocks continue to shrink for the next six months they could potentially come close to being as low as 1 million bags. This will not only be sending a strong buy signal for investors, particularly large funds but could also lead to short term price distortions where nearby futures trade at a much higher price than further forward positions.

Explore WisdomTree 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.

Vanya Dragomanovic

Vanya Dragomanovich

Vanya is an award-winning financial journalist who has worked in both television and newswires. She spent over 10 years at Dow Jones covering commodity markets, including metals, coffee, cocoa and oil. She also reported from the floor of the London Metals Exchange, and appeared on CNBC to discuss international metals markets. Since then she has written for several leading financial publications, including serving as commodities editor for FTSE Global Markets.

Vanya continues to cover international commodities markets globally, specialising in particular on metals and alternative energy. She is also the author of a book on CFD trading.

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