Since #Coffee is an agricultural product, the weather is an essential component in the #coffeemarket. The fact that we must rely on weather for a good crop means that volatility is a core feature of our market. It also means that there is an opportunity.
With the proper analysis, monitoring the weather in coffee producing countries provides an important insight into future price movements. Those who received early warning of the severity of the 2021 frost received an important edge on one of the greatest coffee bull markets of the last 20 years.
Our premium clients receive this as a service from us (free trial here), and in this article, we will share our methodology for how we convert the complexities of climate forecasts into tradeable insight in the coffee markets.
Understanding Weather Tables and Their Importance
Just like any other commodity, coffee prices are driven by supply and demand balance (S&D). Therefore, all weather analysis is done with the intention of forecasting and understanding impact on S&D.
It is therefore crucial for traders to see at a glance what total weather impact will be on global S&D, and this is exactly what our summary tables show.
The weather summary table provides a simple outlook of the global weather scenario separated by coffee crop phase and production quantity. When we multiply weather influence by crop size we get total market impact.
In the table above, we can quickly and easily see that the weighted summary of all the producing regions of the world tended to an alignment with their respective seasonality's when this table was generated. Good weather = good supply = cheaper coffee. Therefore, the weather forecast shows a bearish influence on coffee prices.
Weather influence is driven by the phase of the crop season and precipitation levels. As coffee is a plant that relies on rain and sun for proper growth and harvest, the weather provides direct insight into how the S&D may change.
For example, if there is dryness in Brazil (world’s largest producer of Arabica Coffee) during the cherry growth phase of the wet season, we may see production potential reduced, leading to a significant bullish influence on C prices (see 2014 for when this happened).
Since size matters in the coffee market, it is important to compare potential impact to potential crop size.
This unique methodology is possible since we use weather forecasts from the exact regions where coffee is grown inside each origin. This gives us a summary of the impact of total weather.
In addition, each cell is marked on the left with a sign, which indicates normality (checkmark), deviation from normality (exclamation), or a warning (X). These symbols provide a quick focal point to alert the reader to seek more detail.
Looking at the more detailed table above, we can easily see why the summary looks so bearish. Virtually all world origins had a good past few months and have good prospects in the forecast when this table was generated. Thus, the weather will have a bearish impact on coffee prices.
The question then remains how we generated these tables. Therefore, I will briefly detail how this is constructed.
Producing Regions and Their Share
As you can see in the table above, each origin contains a line with an overview of crop phase and precipitation (past, present, and forecast). This is then compared with the share of production each origin has of the world’s total.
For example, the Region of Paraná, in Brazil, produces ~2% of the total production, while the South of Minas Produces almost 40%. Thus, precipitation in Paraná should not have the same relevance as precipitation in Minas.
To differentiate these, we map out the exact regions in every origin where coffee is grown and measure the precipitation forecasts. Our proprietary production maps and software analyzes the expected precipitation for each region and incorporates it into a production weighted summary in our weather table.
Since context is important, we provide visualize maps that show which regions are being measured and what the weather is around those regions as well. This provides the context and allows a quick visual verification across different origins and time frames, such as the weekly and monthly. Temperature maps are also included and analyzed, as these can provide additional context (and very useful during the Brazilian frost season).
One of the key benefits of conducting the analysis in a methodical way such as this, is that it provides consistency. Regular monitoring with a consistent methodology allows us to see when the forecast models change, to what degree and in which of the origins.
Keeping regular track enables us to have an objective insight into the global climate scenario.
We also encourage you to think in layers.
All of our reports start with summaries, and include tables of contents. This enables the reader to quickly scan for potential problem areas, but also allows for depth when examining specific problems. For example, if there is something interesting happening in Central America or Colombia, we can drill down on these areas and examine what is happening there.
It also enables those clients who are primarily concerned with one region or origin to get the information that they need quickly, while still keeping tabs on the global situation.
Harvest Calendar
The final component of our analysis involves the Harvest Calendar.
The impact of weather is contextual to the growth stage of the plants in that region, as different phases of the plant growth require different weather patterns for optimal maturation.
A large volume of rainfall, without context, tells us nothing about whether it is good or bad for a crop. In the middle of the harvest season, it may be a disaster, but during the cherry growth period it could be a boon, especially after some dryness.
To this end, we have developed the following shorthand definitions to approximate what is expected for each phase:
Comparing the current precipitation levels vs their seasonal expectations provide us with an objective measure of how the crop will be impacted. This analysis provides us with the shorthand symbols that are included in the summary tables shown at the beginning of this article.
Conclusion
Monitoring the weather of the global coffee world provides an important insight into S&D, crop potential, and crucially, impact on coffee prices. However, given the complexities of the weather, it is easy to be inconsistent in your analysis.
Having a tool like our weather impact report with a consistent methodology is therefore an essential tool for providing timely understanding, and context of potential impacts.
If you would like to receive our weather reports on the global coffee market, we would love to hear what you think of them! Sign up here for a free trial and put our work to the test.