Despite the fact that coffee is one of the most popular drinks in the world, it is not among the top investment tools, judging by the enthusiasm of investors. Compared to other commodities such as gold, silver and oil, coffee is not so popular. But people who invested in coffee in 2020 or earlier are now making a profit, as coffee prices reach their highest since 2015.
Let's look at the coffee market to better understand the price dynamics and get an answer to the question whether it is worth buying coffee at current levels.
Coffee as a financial instrument
Investors can buy and sell coffee through the futures exchange. Coffee contracts are traded on the CME Group. Each futures contract is 37,500 pounds. Contracts are priced per pound. If coffee futures are traded at $100 per pound, then the full value of the contract is $37,500.
Platforms where you can buy contracts for difference (CFDs) allow you to speculate on goods and other instruments. Instead of immediately buying expensive futures contracts, investors trade CFDs, the value of which rises or falls depending on the movement of the underlying asset. In our case, this is the price of coffee.
CFD brokers offer leverage, so investors using leverage can buy more CFDs by investing less capital. It is necessary to remember that leverage can increase your losses if the market goes against you.
There are two types of coffee: Robusta and Arabica. At the same time, Arabica coffee beans account for 75 percent of world production. Arabica is sold at a higher price compared to Robusta. Key coffee giants such as Kraft, Procter & Gamble, Nestle and Sara Lee, acquire almost half of all coffee produced for their own use.
Coffee beans grow on small trees, and it is vital that they grow under optimal weather conditions. Bad weather can affect the entire global market.
Brazil is one of the largest coffee producers, and under normal conditions produces almost 40% of the world's coffee. Brazil, Vietnam, Colombia, Indonesia and Ethiopia account for about three-quarters of the world's coffee production.
Comparison: Arabica vs Robusta
- Higher acidity
- Lower caffeine content
- Sweet and mild taste
- Pronounced and fragrant notes
- Lower acidity
- Higher caffeine content
- Strong, rich and bitter taste
- Burnt wood/rubber fragrance
The forecast of coffee prices depends on the drought in Brazil
Coffee is not the only product whose price has increased significantly over the past year. News about coffee prices and analytics are not nearly as detailed as for gold or oil.
Gold and oil have more noticeable growth catalysts, so it is easier for beginners to invest in them. For example, the growth potential of gold is based on concerns about inflation, and oil prices correlate with the results of OPEC+ meetings.
So, what determines the prospects and trends of coffee prices?
Perhaps the most notable factor is the ongoing drought in Brazil. Reports of a devastating drought began to appear in the headlines at the end of 2020.
The USDA said in a June 2021 report that global coffee production in 2021/22 is projected to decline by 11 million bags to 164.8 million, mainly due to weather conditions in Brazil.
It seems that there is no solution to the problem of drought in Brazil in the near future. And this bodes well for the forecast of coffee prices until 2023.
Commerzbank agricultural analyst, Dr. Mikaela Helbing-Kul, said that if the drought lasts until August, its consequences will also affect the harvest season of 2023.
Nevertheless, traders and investors are wondering whether the recent surge in coffee prices is the result of the fact that the market has taken into account the drought factor, or whether it is still worth waiting for a bullish trend in prices.
Coffee price forecast: assessment of key levels
Coffee in July was trading around 154 USD per pound. Key Support and Resistance levels for Coffee:
- 128 USD - minimum on April 16
- 137 USD - minimum on May 3
- 145 USD - minimum on May 24
- 165 USD - June 1 maximum
- 182 USD - the maximum of 2015
- 200 USD is a psychologically important level
This does not mean that coffee prices will not be able to exceed these levels. In fact, coffee was trading below 100 USD per pound in 2020 and above 300 ISD per pound in 2011. Looking even further, the last time coffee prices traded above $300 was in 1997.
Although it can be difficult to make a forecast of coffee prices for a couple of years ahead, since it depends too much on weather trends, it is a little easier to assess the short-term trend.
And a short-term rally first formed on the charts in July 2020, when the price of coffee exceeded the 20-day moving average. The charts show that coffee broke up its moving average in April 2021 at about 130 USD, and then the momentum helped it to exceed 160 USD.
The price of coffee very quickly reached a maximum of 165 USD on June 1, 2021, a level not seen since October 2016, and continued to trade below the moving average, where it was at the beginning of July. This in itself signals a bearish mood on coffee prices, but it is necessary to analyze other indicators before making any conclusions.
What's next with the forecast of coffee prices?
The Relative Strength Index (RSI) has recently reached overbought territory three times, the last time around April. At the beginning of July, the RSI was around 50, this is the middle of the range, so it won't help us much.
Investors have three options. Sell coffee, open a long position on coffee, or wait until the picture becomes clearer.
The arguments in favor of selling coffee are based on the belief that the market has already taken into account the ongoing drought in the price, and the price decline from 165 USD to current levels is only the beginning of a long downward trend.
In this case, investors should consider setting a stop loss above 165 USD, for example, at 170 USD. If the coffee successfully overcomes the resistance level of 165 USD, this may be a sign that selling is not the correct option.
But the last few days have shown that buyers are trying to raise coffee prices significantly above the level of 150 USD. Combined with the fact that coffee prices are noticeably higher than they were at the end of 2020, we can assume that the rally still has prospects.
In this case, a stop loss at the level of 145 or 137 USD is appropriate, since a drop below the support level indicates that there may be a rally.
Frequently Asked Questions
Is coffee a good investment?
Although coffee is not included in the list of the 5 best-selling commodities, it can also open up attractive trading opportunities. Do your own research and think about trading coffee with contracts for difference. CFDs allow you to benefit from price fluctuations regardless of the direction of the market. Open a long position if you think that the price of coffee will go up, or a short position if you think that it will go down.
Will the price of coffee increase in the future?
Coffee prices rose sharply between the middle and the end of 2020, reaching a multi-year high of $165 in June 2021.
What factors influence the price of coffee?
Weather is one of the most important variables that affects the price of coffee. Other factors include rising demand worldwide. For example, the coffee chain giant Starbucks plans to add 20,000 new stores by 2030, bringing the total number of stores to 55,000 units. If the coffee chain succeeds in new markets, the price of coffee may rise.