Coffee, a universally cherished morning beverage, often kickstarts our day with its caffeine boost. ICE coffee futures dropped by 5.57% in Q2 2023 and by 3.77% over the initial half of this year. As of late, nearby Arabica futures have hovered around $1.61 per pound, showcasing minimal change over recent weeks. For September delivery, Arabica coffee futures have maintained a roughly $1.60 pivot point since Q2’s conclusion.
Consolidation Pattern Emerges
While the continuous ICE Arabica coffee futures contract plummeted to a low of $1.4205 per pound in January 2023, the latest low for the active September contract registered at $1.5505 on July 18.
The six-month chart depicts nearby Arabica coffee futures maintaining a trading range centered around the $1.60 pivot point since late June. From June 26 onward, ICE Arabica coffee futures oscillated within the range of $1.5505 to $1.6830 per pound. As of August 8, at the $1.6150 level, the futures portrayed a neutral stance within a trendless trading pattern.
Persistent Bullish Trend Since 2019
In April 2019, coffee futures hit a low of 86.35 cents per pound—the lowest point since September 2005. Despite the market’s volatility, a bullish trajectory has characterized the past four years.
The twenty-year chart underscores an astounding rally of over 200%, elevating coffee futures from 86.35 cents to $2.6045 per pound. Although the price correction drove coffee futures to a low of $1.4205 in early 2023, a recovery above the $1.60 threshold suggests consolidation below the midpoint of the four-year trading range. The overarching long-term trend retains its bullish character as of August 2023.
Robusta Futures Maintain a Bullish Stance
Arabica coffee beans represent the most popular coffee quality, while Robusta beans cater to espresso and other higher-caffeine content beverages. Brazil ranks as the premier Arabica coffee producer, with Vietnam leading in Robusta production.
ICE Robusta coffee futures exhibit a rally from $1,073 in April 2020 to a pinnacle of $2,976 per ton in June 2023. A recent record high marked Vietnamese production challenges, triggered by weather disruptions and the preference for alternative crops among producers. At the August 8 level of $2,688 per ton, Robusta futures remain in proximity to the peak, exerting an upward influence on Arabica futures.
Anticipating Arabica’s Recovery to $2 Per Pound or Beyond
Several factors support the notion of challenging the $2 per pound mark in nearby ICE Arabica coffee futures:
- Consolidation preceding an eventual directional move, propelled by higher production costs, supply chain complexities, and unpredictable weather conditions in major growing nations.
- Elevated Robusta futures, nearing record highs, bolster the case for heightened Arabica coffee prices.
- Coffee consumption showcases inelastic demand, enabling consumers to absorb elevated prices without significant consumption reduction.
- The bullish trend since 2019, supported by the $1.4205 technical support level, contributes to a positive outlook for Arabica futures.
Forward curve tendencies reflect the market’s expectation of ascending coffee prices in the coming months and years.
The Arabica futures curve depicts slight contango, suggesting equilibrium or short-term oversupply. However, elevated price levels and anticipations of higher future prices signal an expectation of ascending prices until July 2026 deliveries.
Navigating Coffee’s Volatility with Risk-Reward Strategy
The dramatic 200% surge from the 2019 nadir to the 2022 zenith underscores the considerable price variability inherent in the coffee futures market. Weather-induced challenges and crop diseases can yield substantial price fluctuations.
My inclination leans toward the upside for coffee, a constituent of the soft commodities sector. In the past two years, coffee, sugar, cocoa, and cotton prices rallied to multi-year highs, with frozen concentrated orange juice futures reaching record levels. The overall bullish trajectory within soft commodities suggests that coffee prices will rebound and approach the $2 per pound level.
Nonetheless, coffee constitutes a highly volatile commodity, necessitating meticulous attention to risk-reward dynamics for all risk positions. Given its potential for substantial percentage swings both upward and downward, any long or short position mandates a strategy that outlines risk levels commensurate with anticipated rewards. Adapting the reward horizon based on price movements in the anticipated direction is prudent, while risk levels should be adjusted based on market prices, not execution prices. Sticking to original risk levels in the event of contrary price movement is advisable.
Soft commodities like coffee offer considerable profit prospects, but the commensurate risks are crucially tied to potential rewards. Discipline proves paramount for success within the coffee market.
Featured Image: Unsplash @ anastasiiachepinska
