Tuesday, November 22, 2022

Coffee Market Goes Cold as Brazilian Weather Normalizes

Futures prices have plunged since August, with coffee-growing conditions bouncing back from last season’s drought and frost 

By Kirk Maltais of The WSJ. Excerpts: 

"Coffee was one of the hottest commodities earlier this year, but it has now gone cold, with prices declining more than 20% in the past month.

Wet weather in farming areas such as Brazil and Indonesia is raising the prospect of a good crop and bigger coffee supply, sending prices down. At the same time, a strong dollar this year has pressured prices of many commodities.

Arabica coffee futures have shed 22% in the past month."

"Cheaper robusta beans fell 15% in that same time."

"Coffee futures jumped to an 11-year high of $2.58 a pound in February after crops in Brazil were hurt by drought, then frost. Prices softened but then rallied again in late August—and are now down about 30% from then."

"The dollar, meanwhile, remains up for the year, despite a harsh snapback Thursday after new data showed slowing inflation. Commodities tend to be priced in dollars, so a strong dollar makes them more expensive for buyers around the world.

Coffee demand soared during the Covid-19 pandemic when people stayed home, as did coffee prices, so some of the recent price drop reflects a return to normal.

But coffee drinkers shouldn’t expect a sudden drop in the price of their morning joe. Futures prices can take a while to trickle into retail prices, if they do at all. Besides, many caffeine lovers appear unwilling to kick the coffee habit no matter the price."

One problem is that the demand for coffee is inelastic ("The elasticity of coffee demand is only about 0.3; that is, a 10% rise in the price of coffee leads to a decline of about 3% in the quantity of coffee consumed." See Elasticity and Pricing from OpenEd CUNY). So if supply increases or shifts to the right, the price decrease is large, as shown in the graph below.

Related post: 

Can Coffee Bean Growers Be Like OPEC?

No comments: