Tue, April 16, 2024

EU Rules And Drought Drop Coffee to $188, Down 7.7%

Coffee

Quick Look:

  • The coffee market consolidates amid regulations, environmental worries, and supply uncertainties, reflecting recent price declines.
  • EU rules target deforestation, affecting coffee imports, prompting potential circumvention, signaling trading sustainability shifts.
  • Droughts in Vietnam and Brazil hinder production, despite Brazil’s rise, affecting global coffee supply.
  • Bullish patterns hint at price rebound during consolidation, while legislation like the FOREST Act targets coffee’s environmental impact.

Coffee bean markets are currently navigating through a consolidation phase. Recent price movements reflect regulatory changes, environmental concerns, and supply uncertainties. Moreover, as of a recent Tuesday, the bean cash contract was trading at $188, marking a 7.70% decline from its peak in 2023.

The European Union has introduced new regulations targeting agricultural commodities, including coffee. These regulations aim to curb imports from countries contributing to increased deforestation. Consequently, this move is expected to have long-term repercussions on beans prices. Traders might resort to circumventing these restrictions by rerouting beans through other countries, a tactic reminiscent of practices in the energy industry. The implications of these regulations stretch far beyond immediate price adjustments, signalling a shift towards more sustainable trading practices.

Droughts in Brazil & Vietnam Threaten Yield

Vietnam, a significant global coffee bean market player, is grappling with a notable drought. The weather conditions, characterized by low rainfall and high temperatures, spell trouble for coffee production. Brazil, another beans powerhouse, is not faring much better, with a prolonged drought affecting its crop yield. Despite these challenges, Brazil’s bean production is expected to see a 5% rise to 58 million bags this year. Colombia and Indonesia, too, face similar drought-induced production hurdles.

A closer examination of the daily chart reveals a sideways movement from the year-to-date high of $203.76 to $188. This price consolidation is happening around the 50-day and 25-day Exponential Moving Averages (EMA), indicating a bullish pennant pattern and a cup-and-handle pattern. These technical formations suggest a potential price bounce, offering a glimmer of hope for investors eyeing the commodity’s future trajectory.

Coffee’s Heavy Environmental Toll in US Trade

Coffee is the third highest agricultural import in the US, associated with a considerable environmental footprint. Legislation like the FOREST Act, reintroduced in November 2023, aims to tackle this issue head-on. By preventing goods driving illegal deforestation from entering US markets, the act targets commodities like palm oil, soybeans, cocoa, cattle, and rubber. Furthermore, beans could fall under its purview in future stages, highlighting the growing concern over the environmental impact of bean production and trade.

The coffee market stands at a critical juncture, with European Union regulations, drought risks in key producing regions, and environmental concerns shaping its future. As stakeholders strive to adapt to these changes, the bean price forecast remains a topic of intense scrutiny and speculation. The interplay of supply dynamics, regulatory changes, and environmental considerations will undoubtedly continue to influence bean prices, offering both challenges and opportunities in the quest for sustainable and profitable coffee trade.

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