Good morning and happy Monday,
With waning prospects for colder weather in the Brazilian coffee belts, every day last week was lower than the day before and today continues the trend, once again having broken the 1.00 dollar mark so far, stopping just in front of a tiny gap in Sept from 98.60 to 98.45. Right now, the charts look just awful, bringing back longer term funds to the short side. Expecting support around 96.00 and a break of that would perhaps mean a test of the recent lows.
Would like to share with you some thoughts penned by our Dave Joleson about boom and bust cycles and this current coffee market we think it’s really good…
It is often said that the cure for high prices is high prices, and the same is true to low prices. Simple economics – the longer that prices are high, the more producers are incented to supply ever more product, while the demand side will weaken to the extent that buyers are price sensitive. This can lead to a crash in prices…leading to a reduction in supply and possibly an increase in demand. And the cycle continues.
In coffee, it is hard to know what futures prices are high enough to incent supply or low enough to do the opposite. Each origin is its own mystery – different costs, different currencies, different cash prices relative to coffee futures. A good price for Brazil may not be so good for Costa Rica. But many would agree that if NY futures are $1.50 or above, that’s good; and as we get down to $1.00 or below, that’s bad.
Below is a picture of what a coffee boom-bust cycle looks like and it is not pretty. High prices in the mid-1990’s – partly due to frost in Brazil and partly due to the low prices in the early 90’s – created a 150+ boom. But the bust hangover was painful as the market went not just to $1.00 but as low as about 50 cents for an extended period. It’s likely that the subsequent rally to $1.50 and well beyond – as high as $3.00 – was due to the lost production attributable to those low prices. Notice in the below chart the most recent move above 150 was for a longer period than in the mid-90’s – the red rectangle being much wider. Add in what we know – that due to favorable currency and low cost of production, the economics for Brazilian producers continued to be favorable even when the market fell below 150 – and we have the makings of another bust hangover. The question as we sit here today with the market now at about $1.00 is whether that hangover has run its course or whether the pain of low prices will continue or get even worse.
Nobody knows for sure, but we can say that the low prices experienced recently have not been as low or as long as the crisis in the early 2000’s, while the boom period preceding was longer. Barring a major event this does not leave us optimistic that coffee prices can stage a quick and sustained turnaround.
Notable recent arrivals for us include Brazil 17/18, FTO Sumatra Mandhelings, Colombia EP. We additionally have a new Supremo that just arrived in NY, not yet stripped by Continental. We’d like to remind you we have some really nice Kenya AA and AB just in and can share our cupping notes if you wish. They join our Costa Rica Tarrazu, Guatemala Antigua and SHB and New Guinea Sigri Plantation AA.
Coming soon: Ethiopia Natural Sidamo (Aug 12), RFA certified Sumatra Mandheling Gr 1 DP (about to ship).
How can we be of help today?
The Armenia Team