As US Dollar Slump, Coffee Price Surge Bullishly

As US Dollar Slump, Coffee Price Surge Bullishly


September 13, 2020

Are we seeing the same bullish period in coffee price like 2008-11?

The local coffee production costs in Brazil as the world largest producer are in Brazilian Real and the foreign exchange relationship between the Brazilian currency and the US dollar impacts the price of coffee in the international commodity market. A rising Real and falling Dollar tend to be bullish for coffee while weakness in the Brazilian currency and strength in the US dollar often weighs on prices.

While currency differentials can impact prices, the supply and demand fundamentals dictate the path of least resistance of pricing. Adverse weather conditions or outbreaks of crop diseases can cause the output to decline. In 2020, the global pandemic could affect production. Brazil faces the second-leading number of coronavirus cases and fatalities in the world.

Coffee prices fell to what is close to the bottom end of their pricing cycles earlier this year, below $1 per pound. Over the past few weeks, the price has made impressive comebacks.

Soft commodities can be highly volatile

Soft or tropical commodities have a long history of extreme volatility. The weather, crop diseases, currency fluctuations all contribute to price variance over time.

Coffee has traded in a range from 41.50 cents to a high of $3.3750 per pound since 1973. From 2000, the low has been at 41.50 cents and the high at $3.0625. 

Coffee rises from a higher low

In mid-June, Arabica coffee futures on the Intercontinental Exchange dropped to the lowest level of 2020 when it traded to 92.70 cents per pound. This year’s bottom was a higher low than in 2019 when the soft commodity declined to 86.35 cents, the lowest level since 2005.

The monthly chart illustrates the rebound in the coffee futures market, which took the price to an average of the ICO composite indicator in August rose by 10.7% to 114.78 US cents/lb. All group indicator prices rose in August 2020 for the second consecutive month with the largest increase occurring for Brazilian Naturals.

Over less than two months, coffee futures rose by 37.3%. Price momentum and relative strength metrics were above neutral territory. Weekly historical volatility was closer to the high than the low for 2020 at almost 40%. Open interest at just over the 265,000-contract level at the end of last week has been flat lining since mid-June.

The next target on the upside is the late March high at $1.3065, and the December 2019 peak at $1.3840 per pound. The price pulled back at the end of last week and settled at $1.1545 per pound on the September futures contract.

Moreover, Brazil has experienced the second-leading number of coronavirus cases and fatalities. The global pandemic could significantly impact production and logistics for coffee markets over the coming months. Meanwhile, a shortage of Robusta coffee beans from Vietnam has been lifting the price of Arabica beans.

The price action in commodity markets from 2008 through 2011 is a model for the coming years. In the wake of the 2008 global financial crisis, central bank stimulus created a flood of liquidity that sparked a rally in the commodity asset class. In 2020, far higher stimulus levels from central banks and governments are likely to do the same.

Coffee moved from a low of $1.0170 per pound in 2008 to a high of $3.0625 in 2011 as the soft commodity more than tripled over the period.

If the span from 2008 through 2011 is a model for 2020, expect coffee to pop even higher over the coming months and years.

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