10167 views March 30, 2016 posted by Maja Wallengren

MARKET INSIGHT: Why Are Coffee Prices So Low? It’s All About Stocks!


Most analysts agree that a significant deficit prevails in the global coffee market yet despite a recent rise in the futures market, international Arabica prices are still trading near 2-year lows. How do you explain this paradox to roasters and other industry participants? And how likely is it to expect that coffee prices will rise in the coming weeks and months? The answer is all about the stocks.

This article was originally published in the “Kaffe” magazine of the Norwegian Coffee Association in December 2015 and despite the recent – very modest – rise in the Arabica market, we consider most of the facts and underlying fundamentals presented here still representative of the current market situation.


DEC 14, 2105 (SpillingTheBeans)–World coffee production is suffering because of damage by erratic weather blamed on climate change. Most analysts agree that the recently started 2015-16 crop cycle is going to produce a significant deficit in the supply-demand balance. International coffee prices have, however, continued to trade near the lowest levels in two years at between $1.15 and $1.20 per pound for the past 6 months. This is well below the cost of production in most producing countries, and, in particular, falls short of costs about $1.80 per pound for high quality estate coffees such as those found in Central American countries like Guatemala and Nicaragua. The answer is not necessarily easy to understand, but it’s all about the stocks.

At the height of the coffee crisis between 2001 and 2003, when Arabica futures had crashed to historic lows of just 38 US cents per pound, investment funds made a collective exodus from what was clearly becoming an unattractive market. Some traders joined in the departure, along with many investment banks that gave up on coffee analysis all together.

Coffee producers, roasters and other industry participants found themselves stuck to deal with a market that, day by day, was to grow more complicated and confusing. A decade later, many still struggle to explain what’s going on.

“We have had days where the market moved 15 cents and that’s crazy,” says Carl Leonard, Vice President of Green Coffee at New Orleans-based roasters Community Coffee. Leonard’s comments sum up much of the general sentiment about the modern-day coffee futures market.

“Not only do you have to watch the fundamentals but you have to watch news on what’s going on in the world from China to Russia, because today world investment sentiment will tell you more about which way the market is going to fly,” Leonard told SpillingTheBeans in an interview.

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Much of the heated debate in the market has focused on the buying by investment banks, private and multinational funds and the three years between 2006 and 2008 saw a period of massive buying, with fund positions growing bigger and bigger. At the peak of fund participation in the Arabica market, coffee hedge funds held a net long position of 56,000 positions – the equivalent of around 14 million bags of coffee, according to data from the U.S. Commission of Traders Report (COT) but Index funds at the time, trading almost exclusively long positions, were 63,000 positions long – the equivalent of 15.8 million bags. This means total fund-held long positions between 2008 and 2009 accounted for a stunning volume worth 30 million bags of the coffee moving around the market – or the the equivalent of the total annual production from Colombia, Peru, Mexico and all of Central America combined.

“By 2008 it just got crazy because everybody was so long that the massive commodity bubble popped and right now people – and producers in particular – are today very dismayed that prices had got so cheap because they literally cannot afford to pick the coffee,” said Jack Scoville, vice president for brokers the Price Futures Group in Chicago and a veteran coffee market analyst.


For now, the global coffee market remains well supplied thanks to the new Brazil harvest now reaching the market giving a false impression of beans being available in plenty full supply – but strong Brazilian exports are not related to the actual crop, which by most accounts from traders to producers will yield a crop no more than 44 and 45 million bags and create a deficit in the market of at least 5 to 8 million bags. The problems about these kind of illusive impressions are that the healthy export from Brazil in the first few months of the new harvest starting to reach the market is not based on actual production but solemnly on the pace of exports, which have been strong because the local Brazilian currency the Real has been offering favorable returns to growers well above the equivalent paid by the New York market. But it’s not because of a bigger crop being available and come the end of the first quarter of 2016 between March and April at the very latest, exports from Brazil are expected to start slowing down significantly and that could provide the trigger for the market to move toward higher prices.

Taking a look at the only statistically proven data available, stocks in the two key importing markets of the European Union and the U.S. are actually flat or lower today than what was the case five years ago. Total world stocks according to proven warehouse records in Europe and the U.S. were at the end of October 2015 at between 17 and 18 million bags – equal to less than 6 weeks of global consumption – and actually representing a drop overall with total U.S. green stocks standing at 5.9 million bags and down from stocks a year before of 6.1 million bags. Total green stocks in Europe, at the same time were at 11.9 million bags compared to 11.5 million bags at the same time a year before. But green stocks held in certified warehouses under the ICE futures exchange in New York hit a 3-year-low in October at just over 1.8 million bags compared to well over 2.4 million bags a year before.

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“Price spikes occur only when stocks or use ratios are minimal and market is fragile. It does not match market shocks due to storage but match times of low stocks not low production,” said Brian D. Wright, a professor at the University of California at Berkeley who has written extensively on volatility in agriculture and commodity markets. If certified stocks continued to come down this could be a trigger for higher prices and for everybody else in the market, watching the stocks reports is key to what prices will do.

At the same time stocks have fallen, global consumption has expanded by almost 20 million bags since 2009. Based on recent years annual growth rate of 2.4 percent world consumption is set to approach between 154 million and 155 million bags by the end of the 2015 calendar year, up a stunning 19.5 million bags since 132.3 million bags in 2009, according to the International Coffee Organization.

“When I go over my calculations, the bottom line is that Brazil has a deficit and the only question is how big it’s going to be,” said Pedro Echavarria, an independent analyst in Colombia. “We only need to have a little bit of problems with the forecasts for one of these regions, be it Brazil, Central America or even Colombia not producing as much as many are hoping for, and then the market will be in a position where it lives from one crop to the next. This is not a healthy situation,” said Echavarria.

Roasters beware, it’s time to buy coffeeheart


For more information about the Norwegian Coffee Association and to see this report in full please see; http://kaffe.no/

Maja Wallengren has been writing about coffee for more than 20 years from over 45 coffee producing countries across Southeast Asia, East and West Africa and across Latin America. She can be reached at: mwallengren@outlook.com.



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