#Weather is one of the key reasons that agricultural #commodities are volatile, and in #coffee this is particularly acute. It is often remarked that Coffee is the second most actively traded #commodity after #energy (it's not true, its a myth), but Coffee is extremely popular among #speculators. One reason that coffee is so keenly desired by speculators is that the #biology of the coffee plant and the chaotic nature of weather systems combine to make a volatile mix. In this short article, I explain how I look at coffee weather in general and how traders can interpret weather reports for coffee.
The fundamental framework for looking at coffee weather as a trader is essentially that we are anticipating changes to S&D, so first and foremost coffee weather analysis is focused on the areas with the highest concentrations of coffee. This means primarily two regions, #Brazil and #Vietnam. Other regions are important as well on a global scale #Colombia, #Indonesia, #Ethiopia, and #Central America to name a few, but when anticipating weather's price impact on the futures's market we will always be anticipating changes to the S&D. This is why the vast majority of the global focus is on the 2 largest producers of coffee.
The weather in other countries is important as well for the local S&D of those particular origins, and the buyers and sellers of those coffees, but the impact on global prices will be directly proportional to the quantity of coffee affected. Of course, the same basic weather principles will apply to any coffee producing region. Now that we know where to look, we need to know how to look. This comes down to the coffee plant's biology. Plants in general are adapted to a particular climate, so they tend to thrive when that climate behaves as it usually does. In other words, normal = good. Any deviation from the usual climatology can be problematic. Let's look at how. The two main data points we will be looking at for coffee crops is precipitation (rain) and temperature. Coffee is like Goldilocks, she doesn't like it too hot nor too cold, too wet nor too dry. However, the actual impact of atypical weather will vary based on the point where we are in the harvest cycle, and the degree of deviation from normal weather. Let's start with a brief look at the harvest cycle. Coffee has an annual harvest, that is typically harvested in either May or October, depending on whether it is planted above or below the equator. The below graphic outlines the basic cycle.
The tree starts with #flowering on new branch growth, then once the flowers are pollinated, the new beans grow and develop, while concurrently growing new branch growth for the following years crop, the beans ripen and are harvested and then the cycle begins again. Each phase of the cycle has different vulnerabilities. During the flowering, the plant is particularly vulnerable to dryness and heat. It needs rains to induce the flowering and follow-on rains to maintain those flowers and facilitate the setting of the beans. Too little rains, or not enough follow-on rains can cause flowers to abort or not set into beans. Too much heat can cause flowers to "burn off" and die. During the #cherrygrowth phases, drought can stunt bean growth or in extreme cases cause beans to be aborted. The #harvest phase is the opposite of the flowering, too much rain can be a problem as it can knock ripe berries off trees before they are picked ("dropping"), but worse than that it can cause headaches and quality issues for drying natural or freshly washed coffees on patios and tables. Perhaps even necessitating mechanical drying.
This is also the period where frost can arise. #Frost attacks the new growth that will support the following year's flowers and beans and in extreme cases can kill larger branches or even the whole plant (especially if they are very young plants). How do we analyze this? Since coffee is a tree plant like cocoa or oranges, it is much hardier than row crops like wheat or cotton. This means it has a longer time frame, when looking at precipitation I like to look at 90-day cumulative rainfall and think about problems in terms of Z-Scores (deviation from average divided by standard deviation). If you don't understand z-scores, just think of it like this. This translates the deviation into a context that is relevant to the normal climatology. A #precipitation Z-Score of -1 is a problem, -2 is a significant problem and -3 is a big problem. The below graphic from professional commodity weather service Speedwell Weather shows some various coffee indices and their corresponding Z-Scores.
Frost is mostly a binary event, either temperatures are below 0 C or they aren't. That is not entirely true, though, there are degrees of frost. Much below 0 for a longer time will cause more damage than just touching 0 for a moment. However, unlike precipitation, the degree is going to change over a period of hours rather than days. Heat is less binary than frost. Sustained high temperatures for long times exacerbate drought conditions and can cause precipitation to evaporate before it is able to be absorbed by the plant. For this reason, looking at average temperatures over a period of days and weeks is useful. When it comes to predicting the weather, that is a more complex science and beyond the scope of this article. I will provide a couple of reports and heuristics that we can use though. First, weather forecasts approach 100% certainty with the present and little more than 50% accuracy at the 2-week point. In other words, within 2 weeks you have reasonably accurate forecasts. You want to apply whatever the 2-week forecast is to your current 90 day cumulative is to get the most accurate forecast as far out as you can get.
Sample Monthly Precipitation Anomaly taken from CTA's Weather Reports
Second, beyond the 2 week point we are going to be looking at anomalies on weekly and monthly ranges. These are not accurate as a rule (with notable exceptions) but give us a clue and an early warning to potential problems. We can take these as more accurate when combined with other known weather phenomena like El Niña/La Niña events. If you would like to see this in action, we include a comprehensive global coffee weather report in our premium subscriptions. You can sign up to receive these on a free trial basis here, where you can put your new coffee weather knowledge to action!