Coffee Mar '24 (KCH24)

Description

Coffee is one of the world's most important cash commodities. Coffee is the common name for any type of tree in the genus madder family. Coffee is a tropical evergreen shrub that has the potential to grow 100 feet tall. The coffee tree grows in tropical regions between the Tropics of Cancer and Capricorn in areas with abundant rainfall, year-round warm temperatures averaging about 70 degrees Fahrenheit, and no frost. In the U.S., the only places that produce any significant amount of coffee are Puerto Rico and Hawaii. The coffee plant will produce its first full crop of beans at about five years old and then be productive for about 15 years. The average coffee tree produces enough beans to make about 1 to 1 ½ pound of roasted coffee per year. It takes approximately 4,000 handpicked green coffee beans to make a pound of coffee. Wine was the first drink made from the coffee tree using coffee cherries, honey, and water. In the 17th century, the first coffee house, also known as a "penny university" because of the price per cup, opened in London. The London Stock Exchange grew from one of these first coffee houses.

Coffee is generally classified into two types of beans: arabica and robusta. The most widely produced coffee is arabica, which makes up about 70 percent of total production. It grows mainly at high altitudes of 600 to 2,000 meters, with Brazil and Colombia being the largest producers. Arabic coffee is traded at the Intercontinental Exchange (ICE). The stronger of the two types is robusta. It is grown at lower altitudes, with the largest producers being Indonesia, West Africa, Brazil, and Vietnam. Robusta coffee is traded on the LIFFE exchange.

Ninety percent of the world coffee trade is in green (unroasted) coffee beans. Seasonal factors have a significant influence on the price of coffee. There is no extreme peak in world production at any one time of the year, although coffee consumption declines by 12 percent or more below the year's average in the warm summer months. Therefore, coffee imports and roasts both tend to decline in spring and summer and pick up again in fall and winter.

Meager prices for coffee can create serious long-term problems for coffee producers. When prices fall below production costs, there is little economic incentive to produce coffee, and coffee trees may be neglected or completely abandoned. When prices are low, producers cannot afford to hire the labor needed to maintain the trees and pick the crop at harvest. The result is that trees yield less due to reduced use of fertilizer and fewer employed coffee workers. One effect is a decline in the quality of the coffee that is produced. Higher quality Arabica coffee is often produced at higher altitudes, which entails higher costs. It is this coffee that is often abandoned. Although the pressure on producers can be severe, the market eventually comes back into balance as supply declines in response to low prices.

Coffee prices are subject to upward spikes in June, July, and August due to possible freeze scares in Brazil during the winter months in the Southern Hemisphere. The Brazilian coffee crop is harvested starting in May and extending for several weeks into the winter months in Brazil. A major freeze in Brazil occurs roughly every five years on average.

Coffee futures and options are traded at the ICE Futures U.S. and ICE Futures Europe exchanges, and the B3 Exchange (formerly BM&F/BOVESPA). Coffee futures are traded on the JSE Securities Exchange (JSE).

Prices - ICE Arabica coffee futures prices (Barchart.com symbol KC) began 2023 on a weak note and fell to a 2-1/2 year low in January of 142.05 cents per pound. Coffee prices were under pressure from the outlook for a bumper crop in Brazil after Conab, Brazil's crop forecasting agency, projected in January that Brazil's 2023 coffee production would climb +7.9% yr/yr to 54.9 million bags. A rebound in coffee supplies also weighed on prices after ICE-monitored arabica coffee inventories climbed to a 1-1/2 year high in February. Coffee prices recovered into April and posted a 1-1/4 year high of 207.45 cents per pound. Concern about a global coffee deficit boosted coffee prices after the International Coffee Organization (ICO) projected in April that the global 2022/23 coffee deficit would widen to 7.3 million bags from 7.1 million bags in 2021/22. The El Nino weather event that began in June 2023 was bullish for coffee prices. An El Nino pattern typically brings heavy rain to Brazil and drought to India, negatively impacting coffee crop production. Strength in the Brazilian real also underpinned coffee prices in mid-2023 after the real climbed to a 1-1/2 year high against the dollar in July. The stronger real discourages export selling from Brazil's coffee producers. However, coffee prices then ratcheted lower into October as favorable weather boosted Brazil's coffee crop. ICO projected that 2023/24 global coffee production would climb +5.8% y/y to 178 million bags due to an exceptional off-biennial crop year. Coffee prices then reversed and pushed higher into year-end as supplies tightened. In November, ICE-monitored arabica coffee inventories fell to a 24-year low of 224,066 bags. Coffee prices finished 2023 up +12.5% yr/yr at 188.30 cents per pound.

Supply - World coffee production in the 2023/24 marketing year (July-June) is expected to rise by +4.2% yr/yr to 171.425 million bags (1 bag equals 60 kilograms or 132.3 pounds). Coffee ending stocks in the 2023/24 marketing year are expected to fall by -4.0% yr/yr to 26.529 million bags. Brazil is the world's largest coffee producer by far with 38.7% of the world's supply, followed by Vietnam with 16.0%.

Demand - World consumption of green coffee in 2023/24 is expected to rise by +0.3% yr/yr to 169.500 million bags.

Trade - World coffee exports in 2023/24 are forecasted to rise by +5.8% yr/yr to 142.226 million bags, below the 2020/21 record high of 144.386 million bags. The world's largest exporters of coffee in 2023/24 are expected to be Brazil with 30.8% of world exports, Vietnam with 17.6%, and Columbia with 8.4%. US coffee imports in 2023 rose by +41.7% yr/yr to 40.311 million bags, a new record high. The key countries from which the US imported coffee in 2023 were Brazil, accounting for 15.0% of total US imports, Columbia for 10.9%, Mexico for 3.7%, and Guatemala for 3.2%.

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