Coffee Market Analysis: El Nino’s Devastating Impact

The coffee market has exhibited strong performance in 2023, positioning itself as one of the leading agricultural commodities this year. With cash contracts trading at approximately $183 per unit, representing a significant 30% increase from the lowest point in 2023, coffee has outperformed other commodities like soybeans, wheat, and corn, which have recently experienced declines.

What’s Up With El Nino?

Climate scientists predict the arrival of this year’s El Nino, known for its hotter and drier conditions in the central and eastern tropical Pacific Ocean. It is expected to occur in the latter part of 2023. El Nino’s historical impact on the economy has been negative, causing destructive effects like record rainfall destroying crops in some regions and triggering droughts in others. La Nina often accompanies El Nino, leading to extreme heat and famine in certain areas.

El Nino: The Phenomenon that Poses Problems

The potential consequences of El Nino on major coffee-producing countries such as Indonesia and Vietnam.

Vietnam, the second-largest coffee producer globally, and Indonesia, the fourth-largest producer, are likely to experience reduced output due to the anticipated transition to El Nino conditions in Q3 2023. Additionally, Brazil and Colombia, other significant coffee producers, would also face implications if this weather phenomenon materializes.

Simultaneously, coffee prices have risen due to a drought affecting coffee planting regions in Brazil, a country that annually sells millions of tons of coffee. This further contributes to the upward pressure on coffee prices.

Recent data from the International Coffee Organization (ICO) indicates a decline in coffee exports in April. South America experienced a 6.4% drop in exports, Africa declined by 9.8%, and Asia and Oceania saw a 1% decrease. However, Mexico and Central America bucked the trend with a 1% increase in exports. Overall, coffee production decreased by 1.4% in the 2021/22 period, while consumption witnessed a notable 4.2% increase.

In terms of price movement, coffee prices reached a peak of around $260 in February 2022 amid supply concerns but subsequently declined to a low of $142 in January of this year. Throughout this year, coffee has been in a recovery mode, encountering resistance at $205.98. Currently, the price is hovering near the 25-day and 50-day exponential moving averages (EMA) on the daily chart. Additionally, the formation of a potential head and shoulders pattern suggests a bearish sentiment. Coffee is also facing a slight resistance level at $193, the highest point recorded on February 23rd.

Coffee Addicts Might Have to Hop from Robusta to Arabica

As a result, the cost of instant coffee and espressos, which often rely on robusta beans, could face mounting pressure.  As the market navigates these circumstances, coffee enthusiasts and businesses alike should keep a close eye on the potential impact on their favorite caffeinated beverages.

Considering these factors, it is likely that coffee prices will enter a consolidation phase as investors closely monitor weather changes. A drop below the key support level at $167 would indicate a higher presence of sellers and potentially push prices toward the year-to-date low. Conversely, a breakthrough above the $206 level would invalidate the head and shoulders pattern, potentially propelling coffee prices toward $220. In conclusion, El Nino and other market dynamics present potential upside for coffee prices. Hence, caution is advised as the market consolidates and reacts to changing weather patterns.