Coffee prices are expected to rise, and here is what our analysts say!
USCOF_U, August 10, 2023
Current Price: $160
Trend direction: UP
- COFFEE (ticker: USCOF_U) Coffee, the fuel that kickstarts our mornings and awakens our senses, transcends its role as a morning ritual. Beyond the comforting warmth and familiar aroma, coffee, with its global presence and enduring popularity, sets the stage for a captivating journey into the realm of market opportunities, where each bean carries the potential to brew success.
- Rising Volumes of Brazilian Arabica Coffee Impact Market Dynamics: Large volumes of lower-grade Arabica coffee from Brazil are flooding the main price-setting market. This influx challenges premium beans from smaller, less efficient farms in Latin America and Africa, leading to potential long-term implications for coffee prices worldwide.
- Shift in Benchmark Coffee Contracts:, Traders are incorporating these improved Brazilian beans into bags used to settle benchmark coffee contracts. This structural shift, previously unreported, may influence coffee prices over time. Brazil's coffee exporters association confirms the inclusion, recognizing the enhanced taste and quality of these beans.
- Transformation of Coffee C Futures Contract: Traditionally, the Coffee C Futures contract on ICE exchange represented premium washed arabica coffee. However, recent developments have led to the inclusion of Brazilian unwashed and semi-washed coffee in the bags sent to the exchange for contract settlement. This transition challenges the historical representation of premium-grade coffee in the market.
- Evolution of Coffee Origin Standards: Brazilian farmers have progressively improved the taste of their unwashed and semi-washed coffee, allowing these varieties to be mixed with premium grades from other origins. Despite ICE's intention to maintain quality standards, the distinction between unwashed and premium arabica can be challenging, making it difficult for officials to detect 'unwashed flavours'.
- Challenges in Arabica Coffee Output: Despite a growing global population's increasing appetite for coffee, particularly premium-grade arabicas, the output of such high-quality beans has plateaued in major producer Central America since the early 2000s. This stagnation can be attributed largely to pricing dynamics.
- Struggles of Small Farmers:Small coffee farmers in Central America and beyond face challenges in achieving profitability due to limited economies of scale. The costs associated with labor, seedlings, fertilizer, and pesticides are prohibitive, particularly when coupled with low coffee prices. The result is that even when margins turn positive, the volumes produced remain insufficient to translate into a viable income. Amid these difficulties, some experts suggest that the coffee sector may eventually become dominated by larger producers as smaller farmers find it increasingly challenging to sustain their operations.
- Technical point of view: in April 2019, the coffee futures fell to around $87 per pound, the lowest price since September 2005. While the coffee market has been volatile, the trend has been bullish over the past four years. The bullish trend in the Brazilian real versus the U.S. dollar is also a positive factor for coffee prices. USD/BRL fell from around 5.54 in 2022. to around 4.70 in August 2023. while the current value is around 4.90.
- Closing statement: After months of price consolidation, a decisive shift in either direction is on the horizon. In light of escalating production costs, supply chain intricacies, and the unpredictability of weather patterns in key coffee-producing nations, the scales are tipped toward an upward trajectory in prices. It's worth noting that coffee demand exhibits inelastic qualities, meaning consumers have demonstrated resilience in the face of higher prices, showcasing a capacity to weather cost fluctuations without significantly reducing their consumption patterns.
COFFEE opportunity based on $1000 Capital Investment Calculation:
| Close Price Scenario 2 | $193.00 | + $620.00 |
| Close Price Scenario 1 | $173.00 | + $245.00 |
| Open Price | $160.00 | |
| Close Price Scenario 3 | $143.00 | - $317.00 |
- Calculations for exchange rate used as of 10:05 (GMT+2) 10/08/2023
- Lot Size: 0.05
- This is not a financial advice and all investors should be aware of the fact that they are responsible for any profits or losses.
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