JO - The Economic And Weather Factors That Helped Coffee Prices Explode

Summary

• Great rains for Brazil coffee, but Central American and Indonesia have had crop problems from too much rain last year.
• The weaker dollar and stronger Brazil Real is helping coffee prices and some other commodities.
• Using the Best Weather Spider to trade, featured in Jim Roemer's WeatherWealth newsletter.

The report below discusses why coffee prices exploded this week. Prices fell back on Friday, February 3rd due to a rebound in the dollar. Why are coffee prices so volatile?

Some crop experts are lowering Brazil's coffee crop

Coffee trader Volcafe reported on January 19 that, because of weak flower blooms from drought and frost 18 months ago, it was cutting its 2023-24 Brazil coffee production estimate from 49.8 million bags to 40.5 million bags. This set the coffee market on fire recently.

However, the coffee market will be dictated by the final verdict for the 2023-24 crop, not estimates, and weather will be key in the next few months. In my view, excellent Brazilian rains should mean a rebound in their coffee production, and the situation is not as bleak as some analysts suggest.

Colombia's coffee crop was hit by flooding last year

Colombia's export continues to fall due to the lower 2022-2023 crop.

The Andean country declared the situation a disaster at the start of November 2022, allowing the government to funnel some $433.8 million to meet the needs of those affected and begin repair work where needed.

Indonesian flooding lowers global robusta production

Robusta also found support after coffee trader Volcafe forecasted that the global 2023/24 robusta coffee market would see a record deficit of 5.6 mln bags. Indonesia, the world's third-largest robusta producer, is expected to see its 2023/24 production fall to 9.1 mln bags, the smallest robusta crop in 10 years, due to damage from excessive rainfall across its growing regions.

Too many specs were short the coffee market, causing massive short-covering

This commitment of traders report was from 10 days ago, before the massive short-covering rally in coffee

Because of the cool weather and nice rains for Brazil coffee, coffee prices will likely not rally above $2.00.

There are tight nearby certified stocks as the 2023-24 Brazil coffee harvest will not hit the market for a few months

Source: Judy Ganes

Coffee, sugar, gold, and other commodities benefitted from a falling dollar

Conclusion

Many of the factors affecting the coffee market - see iPath Series B Bloomberg Coffee Subindex Total Return ETN (JO) - I discussed in my report above are already built into prices... or are they?

Seasonally, as you can see, coffee prices go lower by the spring, but my weather forecast updates in multiple countries will be the key for trading the next few months.

The Weather spider in my WeatherWealth newsletter is used by farmers and commodity traders worldwide for multiple commodity markets.

For example, when my Spider is a (-3 to +3), I have more of a neutral (unsure) bias and suggest staying away from trading.

Notice the anti-herd mentality section of my spider (bullish +3) (left table), which I have been discussing since prices hit $1.50 and my Spider changed a month or so ago to more neutral. Too many traders were short the market a week or two ago.

When scores are firmly bullish (+4 or greater), or bearish (-4 or less), that is when to deploy option, ETF, or futures strategies. Notice the table to the right last September; it was a time to be short on coffee when prices broke 25%, 1-3 months later.

With this neutral bias over the last few weeks, the best thing is to stay away from this volatile market and wait till my signals are firmly either bearish or bullish .

For further details see: