The main drivers for a change in price in this period:
1. Macroeconomic factor:
Presidential election in Brazil has slumped the Brazilian currency “real”. This resulted in making profitable to ship the Robusta coffee beans “for delivery on the exchange” in Europe. Plus, the Brazilian coffee producers have been hammered by the currency depreciation as it has raised the cost of inputs of production (such as: fertilizer, pesticides)
However, as we can see the real appreciated back in October that is why the Shipments to Europe have now started to slow down. The cause of this decrease is because the market favors Jair Bolsonaro and is forecasted to be the Brazilian’s new President. However, the latter, as Trump, has some plans such rising the economy in brazil which was in recession with some new financial measures favouring enterprises to invest as well as attract foreign directt investors within the country. Some of the new regulation would increase the use of Amazonian forest resources which would mean more supply provided by the farmers would be available.
2. Currency
The UDSBLR is the relation between the US dollar and the Brazilian Real- shows the value of a us dollar in Brazilian real- so decrease in the graph means the real is getting stronger (to buy 1 dollar you need less real) and increase means the real weakens.
The coffee composite indicator is an index for the price of all kinds of beans aggregated together.
We can also explain this as the Brazilian currency depreciates versus the US Dollar, there is more demand as you can buy the same quantity for less price in USD and therefore the price increases which explains the negative correlation between the USDBL and the coffee composite indicator.
We can see in both graphs during the period of the presidential election in Brazil the price of coffee bean is volatile due to the decrease in political stability of the country.
Arabica Coffee Bean Price:
Robusta Coffee Bean Price:
As we can see in both of these graphs, which represent the price of Arabica and Robusta beans over the past 2 years, the market was bearish for a long time while now. Around the end of September, the price started to increase.
As price of coffee decreased, the demand obviously increased, as importers wanted to buy it while the price is still attractive. However, this level of low prices negatively impacted productivity due to low farmers salaries (which don’t incentive farmers to produce). This results in a high demand and a low supply which pushes the prices up as we are seeing now in the futures market.
Our Recommendation:
As we are currently in a carry market, we think it would better to buy and store the coffee.
References:
https://www.bbc.com/news/world-latin-america-46039996?intlink_from_url=https://www.bbc.com/news/topics/c4wq0zk0wq2t/brazil-general-elections-2018&link_location=live-reporting-story
https://tradingeconomics.com/brazil/currency
https://www.theice.com/products/15/Coffee-C-Futures/data?marketId=5305276&span=3
https://www.climatecouncil.org.au/2016/09/12/trouble-is-brewing/