Coffee was the world’s best-performing commodity last year, but it may now be the worst due to changing weather conditions in Brazil.
Last year, a drought pushed coffee prices up by about 50%, but February and March rains are expected to lead to a greater output for coffee being harvested in May, Bloomberg Business reported April 12. Because of the expected supply increase, exporters are looking to clear out inventory — and hedge funds are betting that will lead to lower coffee prices for at least six weeks, the longest period in over a year.
That means coffee futures have plunged 17% since December alone, making coffee the most volatile commodity over the past year. As market news site Seeking Alpha noted April 13, “[E]xperienced traders will attest that trading coffee is often like riding a psychotic horse through a burning barn.”
The strength of the dollar, too, has played into the coffee market. A strong dollar and weak Brazilian currency, combined, have given Brazilian coffee growers an incentive to sell coffee at lower prices, leading to lower overall prices at export.
As experts have noted, current market conditions offer an opportunity — albeit a risky one — for traders looking to get involved in coffee futures at these low pricing levels.
Global demand for coffee is expected to increase, due largely to the simple fact that the world’s population is growing. Additionally, regions that have long preferred tea over coffee, such as Asia, are seeing both surging popularity for coffee and the rapidly increasing wealth necessary to pay for it.
Consumer prices are generally set so as to weather market fluctuations, but traders and coffee-related businesses will need to keep a close eye on export and import prices in the weeks ahead.