Wednesday, February 8, 2023
HomeMarketCoffee Is About to Be a Hot Commodity. How to Play a...

Coffee Is About to Be a Hot Commodity. How to Play a Brief Rally.

- Advertisement -

It’s time to pour a drop of joe into your portfolio. A recent tumble in coffee bean prices will likely reverse shortly, prompting possible gains of as much as 25% over the coming weeks.

The issue is that the downdraft, caused by collapsing Vietnamese currency, plus an overly optimistic outlook for Brazil’s crop, has gone too far.

“I think the panic stage is over, and we are due for a substantial bear market rally,” says Shawn Hackett, president of Hackett Financial Advisors. “This is an opportunity to go against the trend.” In other words, the broad price trend isn’t higher, although the likely surge over the next few weeks—possibly as high as $2—will be significant enough for investors to watch.

Traders hoping to benefit from the likely jump should consider buying March-dated futures contracts on the London-based ICE. Those who don’t favor buying futures might try the
iPath Series B Bloomberg Coffee Subindex Total Return
exchange-traded note (ETN) which tracks the price of coffee beans. ETNs are like exchange-traded funds but also expose the investor to the credit risk of the issuer.

Coffee prices have suffered an epic slide in the past few months. A pound of arabica beans recently fetched about $1.60, down 34% from a recent high of $2.43 on Aug. 25, according to TradingEconomics.com.

There were two reasons. First, investors are less worried about supply shortages than last year, when the crop got hit by appalling weather.

Brazil’s Southern Hemisphere spring, occurring around now, has brought forth what Hackett calls a “fantastic flowering season” of coffee trees, which could be the best since 2019.

A good flowering season is a key step toward a favorable crop, which in turn has prompted traders to have a bearish price outlook.

That news came hot on the heels of news that the recent harvest was far more plentiful than the previous one. Brazil’s arabica bean production hit 41.5 million 60-kilogram bags in the just-ended 2022-23 season versus 36.4 million in the prior 2021-22 season.

The second thing that happened is a strong dollar prompted Vietnamese growers of robusta coffee to sell their crop en masse, causing a plunge in bean prices. Vietnam is second only to Brazil in coffee production.

“An appreciating dollar is an incentive for farmers to sell their crop because they get more in terms of local currency,” says Jake Hanley, senior portfolio strategist at ETF firm Teucrium. “They look at beans in the bag as unconverted dollars.”

Robusta coffee, which has a more bitter taste, tends to be cheaper than arabica, but movements in the price of one tend to affect the other.

However, the price collapse doesn’t reflect reality. The market isn’t flush with coffee. In other words, coffee supplies will be back to relatively normal in a year or so, but we aren’t there yet. And that is what the speculators are missing, Hackett says.

Another bullish factor is that cash prices for coffee beans in Brazil are now higher than the futures prices. That tends to be a signal that the bearish price outlook is over, Hackett says.

Risks abound in all trades in the agricultural markets. Coffee is no different. Unexpected weather could quickly upend this trading strategy. Changes in currency values and political instability can also impact the agricultural markets, especially in developing countries such as Vietnam and Brazil.

Still, this is likely a risk worth taking. “The downside from here has to be limited,” says Sal Gilbertie, CEO of Teucrium. Put simply, it’s hard to see prices dropping much in the immediate future.

Credit: marketwatch.com

RELATED ARTICLES
- Advertisment -

Most Popular