Is Your Daily Latte About to Get Cheaper?

May 08, 2019

Is Your Daily Latte About to Get Cheaper?
The coffee market has seen better days. Prices recently slipped more than $2.00 per-pound and have not shown any significant signs of strength in recent weeks. With the front-month May ICE Coffee contract trading under $90 per-pound, it begs the question of whether low bulk coffee prices will translate into lower prices for consumers. The answer, while debatable, is probably not.

The global surplus that has weighed heavily on coffee prices over the last two years may finally turn into a supply deficit this year. Such a turnaround could potentially cause prices to jump rapidly by 20 percent or more according to some analysts.

According to a recent article from Bloomberg, Arabica coffee has been one of the worst-performing commodities this year. According to the report, much of coffee’s slump has been attributed to Brazil having harvested a record amount of coffee in 2018 with another massive harvest on-deck for 2019.

Speculators have reportedly been bearish on the market for the last 18 months or so, and prices may have to work even lower before a bottom is finally reached. The market could, however, be nearing a turning point. Bloomberg recently cited the world’s second-largest supplier, Olam International Ltd., as saying “futures could rally amid a smaller surplus as bad weather hurts producers in major growing regions such as South and Central America.”

Not only is your daily latte not about to get less expensive, but the current state of the coffee market could lead to a reduction in specialty blends used by coffee houses and home-brewers. The price of coffee has fallen below the break-even point in some countries, a problem that could drive some suppliers out of the market. The market for higher-grade beans has fallen along with the broader market, and those declines can effectively erase any premiums for higher-grade beans.

The problem has reportedly gotten so bad that in some areas farmers are unable to harvest their entire crops because they cannot afford to pay pickers or cover the cost of fertilizer.

At some point, it stands to reason that production will pull back enough for the market to eventually rally. Any significant change in the supply/demand equation may still be a ways off, however, as Brazil is set for another large harvest.

The front-month coffee contract has been trying to hold above the $90 per-pound level and could potentially be in the process of building a base. A lack of further downside does not necessarily equate to a rally, however, and prices could potentially see largely sideways action for an extended period.

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