We see several signs of a very aggressive coffee (COFFEE) price rally in 2019. Coffee might even qualify as potentially one of the top 3 investing opportunities of 2019 which is one of our key themes. Our most bullish coffee price forecast for 2019 is $2 which is double of the price at the time of writing.
Previously we wrote about several other forecasts for 2019 in the commodities space, think of our gold forecast, silver forecast, copper forecast, palladium forecast, sugar price forecast. Essentially, our focus has been on the larger commodities, even primarily metals. So our coffee price forecast 2019 is just the 2nd in the category of soft commodities.
In order to create a comprehensive picture as input for our coffee price forecast 2019 we do a 360° view of supply/demand fundamentals, intermarket influencing factors like currencies, the futures market positioning, and obviously the long term coffee price chart!
Coffee Price Forecast 2019: Supply vs. demand
First, as part of our coffee price forecast 2019 we look at supply / demand situation.
The supply / demand picture in the coffee market is pretty straightforward: rigid supply situation combined with an inelastic demand. In other words, it is pretty tough to increase/decrease supply and consumers will not drink more/less if the coffee price changes. It makes for a simple equation.
As per this report Coffee World Markets and Trade published in December the world coffee production for 2018/19 is forecast at a record 174.5 million bags, up 15.6 million from the previous year.
Brazil is forecast to account for nearly all the gain as its Arabica crop enters the on-year of the biennial production cycle and Robusta continues to rebound. Record world exports are forecast, largely on the strength of Brazil. Although world consumption is forecast to rise by a modest 3.3 million bags to a record 163.6 million, ending stocks are expected to rebound sharply by 7.1 million bags to 37.1 million. Against this backdrop, coffee prices as measured by the International Coffee Organization (ICO) composite price index have dropped over 10 percent in the last year.
Moreover, as we find more supply/demand details on FoodNavigator.com which confirms that the coffee market is in crisis. That’s because international coffee prices are less than 45% in real terms than in 2011.
“This is a protracted decline that is rekindling memories of the sector’s crisis in the early 2000s,” writes FAO economist El-Mamoun Amrouk in his industry report. “As coffee is the most widely traded tropical product and generates sizable export earnings for countries that rely on food imports to meet their needs, the precipitous price fall is a concern, especially as it impacts the living standards of the roughly 25 million smallholder producers around the world who account for 80% of the world output.”
What this report highlights is the impact of falling coffee prices on the coffee producers, so essentially the human factor. It also confirms that supply is high, too high as it relates to price.
The Daily Coffee News published somem insights on the dynamic of a global price crash in times of oversupply which is how we would characterize today’s situation. The current state of a 2.58 million bag surplus seems both correct and fair: if there is too much product for the global demand then it will always receive a lower price. However, the report points out that the issue face is that the inelasticity of demand and the fixed nature of supply leaves millions of smallholders unable to adapt and quite literally at risk of starvation in the fallout of major downward movements.
ABN Amro Bank confirms the above findings in their detailed report. “The trends in demand, supply and inventories are also important price-determining factors. Due to good yields in the 2017/2018 harvest year, global stocks of coffee have risen sharply. This has led to price pressure in 2018.”
So far it seems that the sources we found on supply/demand are reliable, detailed and confirm each other. We did not find specific trigger to make us think that supply is subject to a decline in the short to medium term. However, there is a clear indication that today’s situation is unsustainable, so there will probably be a natural mechanism that kicks in at a certain point. We simply cannot forecast when and how this would lead to lower supply levels.
Coffee Price Forecast 2019: Intermarket dynamics
From a totally different perspective, but probably more impottant for our coffee price forecast 2019, is the intermarket dynamics that are there in the coffee market. There seems to be a strong correlation between the Brazilian currency Real and the coffee price.
ABN Amro takes adds a very interesting perspective on this point which we consider an ‘intermarket effect’.
Approximately 35% of the global supply of coffee beans comes from Brazil and the trend in the Brazilian real therefore has a strong influence on coffee prices. In the period from January to August, the real fell by more than 25%. This was caused by the trade dispute between the US and China and the stronger dollar. This was followed by a recovery period and the real rose 6% until early December. The recovery was fueled by a decline in the electoral uncertainty in Brazil, optimism among investors about possible reforms and, ultimately, the election victory of Jair Bolsonaro.
For 2019, ABN AMRO foresees a stronger real against the dollar, mainly due to US economic policy and a more favourable investment climate for emerging markets. Our USD/BRL forecast for year-end 2019 is 3.4.
The coffee price will rise due to the stronger real as coffee is largely traded in dollars on international markets. The stronger real makes coffee less valuable and that gives traders in Brazil an incentive to sell less in international markets in anticipation of higher prices. As a result, the availability of coffee in external markets decreases and this will have an upward effect on prices.
Similarly, Bloomberg adds to this that the weakening of the Brazilian real and the Colombian peso against the dollar also played a role in the drop by encouraging local farmers to sell more of their coffee, which is usually priced in the greenback. So did the worst decline in commodity prices since 2015 amid rising interest rates in the U.S.
As we check the Dollar to Brazilian Real long term chart we see that the Real indeed arrived at a very important point: triple resistance. Moreover, with the U.S. Dollar showing signs of an intermediate topping pattern, as explained on our dominant trend monthly review we tend to agree with ABN Amro that the Real might appreciate against the U.S. Dollar in 2019. We first want to see a breakdown in the USD/Real currency pair shown below. It is an absolute condition before putting capital at work in the coffee market!
Coffee Price Forecast 2019: Commitment of Traders
The trend in speculator positions (‘Commitment of Traders’) also has a strong impact on coffee prices. The number of short positions has declined sharply since the end of September on short covering. This means that speculator sentiment regarding the coffee price has improved and speculators assume that the price pressure on coffee will decrease. This is largely based on the expectations concerning the Brazilian real and a stronger demand for coffee at the current relatively low price.
When we look at the 9 year COT statistics, especially the center pane, we see an abnormal situation. The amount and time that commercials are long is unusual. It has happened before in the past, but not as long and as heavy as in 2018.
These are the type of extreme futures market situations that will not last forever. It will adjust, likely together with a strengthening Brazilian Real.
Coffee Price Forecast 2019: The coffee price chart
The long term coffee price chart has an extremely enticing setup.
It has a giant triangle pattern which will resolve in 2019, without any doubt! The million dollar question is in which direction?
The price of coffee is moving to its apex. It is a matter of a few months until this resolves to the upside or downside. The odds favor an upside move. We have seen violent moves to the upside of coffee as indicated in green. Note that coffee tends to move aggressively higher every 2 to 3 years. That’s why smart investors are ready to get in fast once this breakout occurs, timing will be crucial.
The critical price points we have identified:
- P1 Bullish above $1.17
- P2 Bearish below $1.0
- P3 Major peak at $2.0
If there is one thing we know from the past is that coffee moves ultra fast higher once it starts trending (read: once it breaks out).
So it will be of the highest importance to stand ready and act fast, if and when a breakout takes place.
The reasonable high we envision after a breakout on Brazilian Real strength is 2 USD because of the chart structure shown below.
Our Coffee Price Forecast 2019
With all this said we believe that 2 USD might be a reasonable price target for our coffee price forecast 2019. Note this is NOT an average price for 2019, it is more of a peak we expect.
The condition before we can get all in is a combination of a sustained breakout above $1.17 combined with a strengthening Brazilian Real. In such a scenario we believe the picture in the COT report will shift “back to normal”.
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