STiR coffee and tea magazine

Volume 5, Number 6

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26 STiR coffee and tea / Issue 6, 2016 (December/January) 2012 Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 2013 2014 2015 2016 2017 Charts by CQG $1.79 A By Dan Bolton Coffee Volatility Brazil Drought 2014 50% Slide 2015 Brazil Drought 2016 year ago, in February 2016, coffee prices were near five-year lows. Coffee prices declined 20% in the first quarter. By November ICE contracts for arabica coffee futures were trading at two- year highs, reaching $1.79 per pound for March 2017 delivery. A few weeks later in December prices had fallen to $1.38 per pound. The fact that coffee is one of the most volatile commodities is a given. Weather is unpredictable and therefore always a factor in pricing as it determines harvest volume and crop quality, simultaneously im- pacting supply and demand – but this cycle has given traders and roasters unusual variables to consider. Rising risk Risk is described as uncertainty that matters. Classic risk-management strategies are only now adjusting to uncharted vagaries of weather and the interconnectedness of the global economy. • No one in Brazil remembers droughts occuring in January or February, yet for the past two years little rain has fallen and reservoirs are now dangerously low. Setbacks in arabica production could be temporary, the result of El Niño, but many fear a foreboding change in climate. Meanwhile robusta yields fell 40% in Brazil. On the other side of the globe Vietnam, the world's second largest coffee producer after Brazil, is facing a 3 million 60-kilo bag shortfall. • Currency fluctuations are counter-intuitive. The value of the US dollar has risen steadily since 2002. In fact the trend toward a strong dollar has accelerated against all the world's major currencies, notably the British pound and Euro. Since coffee is a dollar-denominated commodity, falling prices would seem to benefit roasters and consumers at the expense of producers. Why plant more to get less? In fact producers in Brazil and Colombia and Indonesia increased pro- duction despite low prices because they are actually netting more money in local currencies for every bag sold. Farmers and exporters have an incentive to draw down stocks, releasing coffee into the interna- tional market even as prices fall. While arabica production declined to a three-year low the Brazilian real depreciated by more than 50% last year sending exports to record levels. • Political uncertainties are the latest unknown. In the near horizon the new US administration adds to global uncertainty. No one knows how to read Washington D.C. right now. The Trans-Pacific Part- nership (TPP) looks doomed. NAFTA may be in jeopardy. Britain's decision to leave the European Union has unsettled trade in the most important coffee market in the world. In Greece the long term economic malaise has significantly altered the market. Coffee Prices 2012-2016 $1.38

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