Weather-Driven Rallies – Coffee Goes Bananas
The top performing commodity so far this year has been coffee, which erased almost to years of declines within a few weeks in a rally driven by news of a worsening drought in Brazil. As the Guardian reports:
“Don’t panic. But there could be a global coffee shortage. Usually, during this time of year, the delicate arabica coffee plants in the mountains ofBrazil, where most of the world’s coffee comes from, are maturing. White, fragrant flowers have appeared, followed by cherrylike fruit, each containing two seeds: arabica coffee beans, the most popular in the world.
But last month the worst drought in decades hit Brazil’s coffee belt region, destroying crop yields and causing the price of coffee to shoot up more than 50% so far this year. The drought is historic, forcing more than 140 cities in Brazil to ration water. Newspapers reported that some districts are receiving water only every three days.
For now, retail prices for coffee are stable. Roasters typically have enough supplies to cover themselves for a few months. But if the price of the arabica beans continues to rise, consumers could start seeing the cost of their morning coffee creep up later this year, according to Jack Scoville, a futures market analyst specializing in grains and coffee, among other commodities.
Coffee prices are traditionally driven by the weather. The usual pattern is for prices to rise sharply when there is unexpected frost in one of the major Brazilian growing regions. Droughts are actually a bit of an exception, but the current dry spell is happening at a decisive time of the year, when the coffee plants apparently need moisture the most.
Since coffee prices are always weather driven, the rallies tend to be swift and spiky, and are as a rule followed by long, drawn-out declines. Coffee so to speak becomes a ‘get rich quick’ scheme every few years. The current rally has been big, but if the drought continues, it could easily become even bigger, considering the historical trading range. It is also worth mentioning that global coffee demand continues to grow, a side effect of economic growth in emerging markets.
