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Why coffee futures scored their biggest 1-day gain in over 7 years

Myra P. Saefong

Coffee futures soared 10% on Thursday, with prices posting their largest single-session gain since early 2014 and their highest settlement in more than six years, as drought and frost threaten coffee crops in Brazil, the world's largest coffee producer.

"Coffee is up this week due to unusually heavy frost in Brazil," said Sal Gilbertie, president and chief investment officer at Teucrium Trading. "Vietnam and Brazil have been having problems here and there, which had coffee supplies running a touch tight going into this year's Brazil frost season," he told MarketWatch.

July is when coffee trees are flowering and "vulnerable" in Brazil," he said. July is always a risky month for frost in that country, but "the market's worst fears have been realized this year."

Brazil needed a good crop to "buffer somewhat low coffee supplies, and this frost event has eliminated the possibility of rebuilding coffee supplies for another year," said Gilbertie. "The economy is waking up from COVID and needs more coffee, but the weather is definitely not cooperating in Brazil."

The most-active September coffee futures contract rose 17.7 cents, or 10%, to settle at nearly $1.94 a pound on the ICE Futures U.S. exchange. It trades around 20% higher for the week, feeding a month-to-date climb of 21%, according to Dow Jones Market Data. Prices settled at their highest since November 2014.

"Frost and potential for future La Niña weather events poses a risk in Brazil's key coffee growing regions in what's expected to be an 'on year' for production," said John Caruso, senior asset manager at RJO Futures, explaining that on years versus off years are "in accordance with expected production levels based on the trees' growing cycles."

The moves for coffee "started with the shipping container shortage (link) back at the beginning of the year," Caruso told MarketWatch. The shortage, blamed at least in part to changes in the market from the effects of the COVID-19 pandemic, led to higher costs to transport many commodities.

"The negative supply side fundamentals have snowballed from there," said Caruso. "Next year is supposed be considered an 'on year' for production" -- and the market has already been dealing with very dry conditions, which "leaves the margin for error in future weather events at basically zero," he said.

There's speculation of a high probability of having the lowest production levels during an "on year" in the last 6 years, said Caruso. Coffee prices have climbed to their highest levels since 2014 and that year, prices climbed to a high around $2.25 a pound.

Caruso expects coffee prices to "test these levels, if not take them out."

James Roemer, Weather Wealth newsletter author at commodity-trading adviser Bestweatherinc.com, said prices could even climb by another $1 a pound or more later this year, under certain conditions.

Brazil saw frost early this week and there's more forecast in the weather outlook, possibly late next week, which could lift prices to $2.30, he said. Given the tight supplies and frost -- and if the drought continues to late this year, possibly jeopardizing Brazil's 2022 crop, Roemer believes coffee prices have the potential to rise to $3.

Either way, consumers are on track to pay higher retail prices for coffee.

"Throughout the COVID-era, prices have certainly been on the rise," said Isaac Olvera, lead economist and agricultural economist at ArrowStream, a supply-chain technology firm for the food services industry.

The retail price of coffee in June 2021 was up 8.4% from February 2020, but up a more modest 1.9% from the June prior, he said, while consumer prices index for coffee in June was up 2% from last February and 1.1% from last June.

"Brazil's already small coffee crop is likely to get smaller, and already rising coffee prices are likely to continue to head higher," said Olvera. "It looks like the price impacts are likely to extend into 2022."

-Myra P. Saefong; 415-439-6400; AskNewswires@dowjones.com

 

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07-22-21 1421ET

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