We might only be a few short weeks into 2015, but this can be one of the most important periods of the year for the coffee industry, which often relies heavily on one single origin to drive prices. The impact that the weather can play on both crop and price is vital to understand, as is the volatility of the futures market which provides the underlying support for global pricing.
January is an important month for many index funds to rebalance their portfolios, while at the same time, it comes at a significant stage of Brazil's crop development – the effects of which cannot be underestimated.
Here, DRWakefield trader Priscilla Daniel talks through some of the activity that's taken place within the coffee market so far this year.
The futures market
Priscilla explained that the New York Coffee terminal market closed 2014 with a value of 166.60 cents and on the date of our interview (Wednesday January 21st), it hadn’t appeared to have moved very much.
She commented: “This isn’t to say the market hasn’t moved at all. Although it may look as though nothing has happened over the past four weeks, it has actually been rather volatile, with a high of 184.80 and a low of 160.20."
The observance of Martin Luther King Jr day on Monday January 19th gave the markets a long weekend to enjoy. Such events often promote increased market activity beginning on the Friday before and commencing on the Tuesday following. In this instance, the market plummeted over 13 cents in just two days of trading.
Weather
Priscilla explained that speculation regarding the weather in various countries is one of the greatest factors influencing coffee trading activity.
With Brazil still recovering from last year’s drought – which was one of its most damaging in two decades – the world is scrutinising every new report from the country to see what lasting effects there will be and how the current crop is likely to be affected.
DRWakefield's latest reports, dated January 5th-9th and January 12th-16th, include information about the climate in Brazil and its potential effects, but also origins such as India.Priscilla explained: “While the weather in India is unlikely to affect global coffee prices, it is going to impact on local pricing, as well as the quality of the coffees produced."
There have been unusual weather patterns in India for this time of year, with unexpected cloudy conditions affecting bean-drying processes in the country, slowing the speed at which the crop can make its way to the market.
A similarly challenging situation is being reported in Congo, which is suffering slightly following the end of the main season, with an extremely slow flow of coffee out of the country.
Priscilla explained: "The US market is seeing more and more demand for coffee from Congo.”Once seen as great value for money, Congolese coffee is now becoming more expensive, as stability in supply and consistent quality has increased demand for its beans. Producers are less willing to sell at previous low levels, instead holding out for improved prices.
"This situation can lead to a shortage in finances for producers from one season to the next, but it is expected that coffee will soon be flowing freely and ‘normal’ trading will resume."
We are of course only a couple of weeks into the year, and with the new coffee season just around the corner for countries such as Congo, Rwanda, Ethiopia and the main crop from Kenya, there are always some new and exciting coffees to try.
Global stocks
The global coffee supply chain, with all the counterparties involved – producers, exporters, traders and roasters – manages a finely-tuned balance between production and consumption.Its typical bi-annual surplus and deficit yielded by production is smoothed out with careful management of carryover stocks in global warehouses. But with successive poor crop figures in Brazil and an increase in consumption – especially amongst coffee producing nations – could this stockpile of coffee that smoothes out the boom and bust years be running low?
Priscilla said: “Last year’s deficit in Brazilian production went relatively unnoticed in terms of physical coffee shipments, as carryover stocks from the previous season were plenty and utilised effectively."However, stockpiles are depleting and there are fears that they may not be replenished in time, or to high enough levels for subsequent crops. All the while, annual consumption is increasing at a rate of roughly two per cent, which equates to around three million extra bags of beans each year.
Global production, terminal market volatility and the weather are all likely to be hot topics at the African Fine Coffee Association (AFCA) conference, which is set to take place in Nairobi next month. DRWakefield will of course be there and we will update you on our time there upon our return. Photo credit: Thinkstock/Wavebreakmedia Ltd
