- Arabica hit a three-week high after hitting a 20-month low of $1.42 per pound on 11 January.
- Brazil’s coffee production is overvalued, analysts say
- Trader Volcafe says world expected to face 3rd straight year of coffee shortage
As the saying goes, “Wake up and smell the coffee.”
While you’re at it, you’re probably also checking out the chart for — top beans for commodities —.
After four months in the cold, Arabica prices are on the rise again, hitting the ICE Futures US benchmark on Thursday after hitting a 20-month low at $1.42 a pound on Jan. 11. The March contract reached a three-week high of $1.68 per pound.
Arabica has risen 10% over the past two weeks, recovering most of its 12% decline over the past three weeks. This is due to concerns about crops in Brazil, the top producer of coffee.
Charts by SKCharting.com and data by Investing.com
Monthly Arabica prices were flat in January after losing 0.2% in December, 5.6% in November, 19.8% in October and 7.3% in September.
Jack Scoville, chief crop analyst at Chicago-based brokerage Price Futures Group, said:
“There is an idea that the production capacity of Brazil was overestimated.
Brazil’s weather is currently very favorable to production potential, but as with last year’s bad weather, worse conditions seen early in the growth cycle hurt the overall production prospects. ”
The surge in Arabica comes after coffee trader Volcafé warned a week ago that the world would face a third straight year of commodity shortages as top producer Brazil fell short of expectations. rice field.
ED&F Man’s coffee division said in a January report reported by Bloomberg that the global supply of coffee used in instant coffee and espresso blends could fall to record shortfalls amid soaring demand. said it was likely to fall short of demand by 3.8 million bags next season.
The company said demand for the current season is estimated to exceed supply by 4.5 million bags, creating a shortage.
“This represents an unprecedented three-game losing streak. We expect the toughest period to continue from August 2023 to 2024, with global equities, particularly Robusta stocks, falling to record lows.”
Aside from the Robusta deficit, where even traditional brands in supermarkets can be more expensive for consumers, Brazil is also expected to see a smaller harvest of Arabica, the bean favored by Starbucks (NASDAQ:). , which can lead to higher prices at coffee chains and cafes.
Arabica futures hit a 10-year high in February 2022 after two subpar crops in Brazil and Colombia and turmoil in global shipments. Since then, prices have fallen by almost 40%, partly due to market speculation that Brazilian producers will harvest a record Arabica harvest this year.
Citing flower problems in key regions of Brazil’s Minas Gerais state, the world’s largest Arabica producer, Volcafe said Brazil can currently only produce 40.5 million bags of Arabica beans for harvest beginning in May. Said it could be… area. The company has also been affected by frost damage, and he lowered his estimates for the 2022-23 season by 1.1%.
Arabica has traditionally been the most popular coffee variety, but Robusta accounted for 48% of global demand last year, according to Volcaffe, reflecting tighter supplies of cheaper bean varieties. It has been. Arabica is usually more expensive than Robusta, but that spread halved last year as the blend moved to cheaper grades.
The trend toward more robust is expected to continue as inflation and slowing economic growth drive cost-conscious consumers toward cheaper options.
Indonesia, the third largest Robusta producer, is also expected to see its lowest Robusta yield in a decade next season due to damage from excessive rainfall in key growing regions. This puts pressure on the global shortage of breeds, which is projected to double to 5.6 million bags next season. The bag weighs 60 kg.
“We expect strong use of Robusta to continue around the world until either consumer demand or relative prices drive a significant return to Arabica.”
So what does the Arabica technical chart tell us? How well can premium coffee beans fare from here?
Sunil Kumar Dixit, chief technical strategist at SKCharting.com, said a test of $1.83, the level last seen in November, could be in the next card.
“Coffee futures weekly chart shows a bullish consolidation above the descending channel support line that could cross the channel resistance line.”
Dixit said the short-term outlook for Arabica remains bullish, with the 5-day exponential moving average (EMA) at $1.62 crossing over to the daily middle Bollinger band at $1.59 and overlapping the 50-day EMA at $1.63. I said it is possible.
“Going further, $1.83 will be the next challenge for coffee cows.”
Conversely, if Arabica falls, short-term support is likely to pick up at $1.55, he said.
Disclaimer: Barani Krishnan brings versatility to the analysis of any market using different perspectives other than your own. In order to remain neutral, he sometimes presents dissenting opinions and market variables. He does not hold positions in the commodities or securities he writes about.