The Logic Behind Rapidly Rising Coffee Prices by Max Nicholas-Fulmer

The New York “C” Market has rallied 60 cents per pound in under 3 weeks on concerns of drought conditions in some of the main Brazilian growing regions. This dry weather is occurring during the cherry development phase of the next crop. Still it is unclear what, if any, effect this will actually have. Most large Brazilian growers irrigate their fields, and some rain has actually developed and more is in the forecast. Many in the trade are calling for a 10% reduction in the 2014/15 crop. While this is on the order of several million bags, that’s a reduction that the world could absorb. Far more worrying from a roaster’s perspective is the suddenness of this market move and the fact that nearly all of the buying can be attributed to large speculative commodity funds.

Today the market is trading above 173.00 against the SPOT May 2014 contract. The speed of this rally and the comparative heights it has reached may be dizzying, but it bears remembering that the market can, and periodically does, go much higher. We’ve seen this movie before. The chart below shows the entire history of the “C” contract since the early 1970’s. The black line, which indicates the 50 month average price, sits at 160.00. Today the market crossed that threshold. What really bears looking at is the fact that over the past 40 years, only once has the market gone above 160.00 and not then gone on to 2.00, 2.50, and even 3.00+. Of course, that one time was in 2007, and the catalyst for that move and the subsequent snapback was…wait for it…a drought scare. However, that period of dryness took place in Sep/Oct, a time of year when lack of rain is commonplace.

Dryness in January and February could potentially be a lot more problematic. It is, in fact, largely unprecedented. Given the long lead time before anyone will actually know the extent of the damage, the market has a lot of room to go much higher in the meantime. We are very clearly now in “run-away freight train” mode. When news outlets like Bloomberg and the Wall St Journal start talking about coffee prices, they pop up on the radar of every hot-shot master of the universe with a margin account. It is far too dangerous to sit back and hope that this will turn out like 2008. 170.00 is high, no doubt, but with some creativity in your buying strategies, you should still be able to make money at these levels. A market above 2.00 starts to get seriously problematic. You have to cater to the very real possibility that this is right around the corner. Most roasters have at least some coffee in position. You need to immediately begin cost averaging and thinking about the possibility that you might have to raise prices fairly soon. If you have not already covered at least some of your needs for the first half of the year, give us a call to discuss the possibilities.