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The Impressive Rise and Fall of the Coffee Market – a Retrospective Part 1

Updated: May 21

From Mar 19th to Apr 18th, the Arabica market rallied an impress 60c, or more than 33% with no tangible fundamental cause.  However, the market didn’t stop there, by May 7th the market has dropped nearly 50c, practically erasing almost the entirety of the previous month’s gains. 


As someone who makes their living discussing the risks in the coffee market, I am embarrassed to say that I was caught off guard by this.  We were not the only ones surprised by this.  When the market rallied above the 200 c level on Apr 3, the coffee world was abuzz with phone calls and speculation as to what was happening. 


With the benefit of hindsight, it seems quite clear that this was a spec driven rally, sparked by an external stimulus.  However, at the time it was unclear what was driving the buying, and whether it would continue. 


In this article, we will examine the background of the coffee market during this time, what led to the rally and eventual fall of the coffee market and what to expect going forward. 



Background 

By January of 2024, the coffee market had recovered from the lows around 150 and soon settled into a range between 180 and 190.  This price is what a mentor of mine used to call “half-pregnant”, meaning it is an awkward price that is not really cheap nor expensive. 


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We can say that the Arabica market was a bit confused by bullishness in the present (low certified stocks and inverted calendar spreads) but bearishness in the future with the promise of surpluses and higher crops.   


Our own Brazil farmer survey conducted in Feb of this year, forecast a substantial increase in crop size for 24/25 vs the prior year.   


Meanwhile the COT showed that specs were already quite long (meaning limited room for buying and high room for liquidation) and so the downside seemed like the more likely vulnerability.  Additionally, the US dollar forecast was bullish which would put substantial headwinds for coffee. 



All of this would suggest a bearish bias to the market, especially once the certified inventory started to increase at an accelerate rate.  



Yet even with this bearish bias, the market held.  This is actually a contrary omen.  When the market ignores bearish news … that’s a sign of bullishness.  



However, it wasn’t all bearish news.  Some arabica origins in Central and South America had reported disappointing crops, and attacks on container ships traveling through the red seas added expense to one of the most in-demand coffees: Vietnamese Robusta. 


Normally, the cheaper robusta market follows the lead of the Arabica market as cheaper Arabica pushes down the price of Robusta and expensive Arabica pulls up the price of Robusta, but not usually the other way around. 


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Historically $2200/MT is quite expensive for robusta, but that only equals about $1/lb which is still cheap for Arabica.  However, by Jan 2024, Robusta had already hit $3000 and by March it started pushing up again.  Vietnamese coffees, usually one of the cheapest of the robustas hit absurd differential prices that topped $700 over.  This double whammy of high terminal prices and high differentials actually started to chase demand away from Robusta and into Arabica. 



The Vietnam market had been on fire from high demand for their coffees combined with lower crops.  To make matters worse, the forecast was now starting to show heat and dryness during the essential rainy season. 

  

What Happened 

Since February we have been projecting dryness in Vietnam during a crucial period of the growth season.  This was at first a distant possibility, but as we got deeper into March, this became more and more likely. 



As the drought forecasts became more and more certain this just added to the robusta rally.   


Arabica traded in the range during this period but started to pick up somewhat and move towards the higher end of the range thanks to Robusta. 


The speculators were already “max long” in both coffee markets, which is clearly a misnomer as Arabica would soon see new highs of length.  However, when we say that a market is “max long” we really mean that speculators are around the high watermark, this usually means that hedge funds have invested as much as they can in the market and there is little remaining buying potential. 


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Commercial longs by contrasts were not convinced of the rally and had underbought (as is typical when prices are high).  While we did not expect major spec buying, we did recognize the risk that commercial longs (roasters) may become fearful and buy the market to protect themselves.  However, the most likely scenario is that the top-heavy specs, would liquidate. 


What happened next though, was a surprise. 


Unseen by many in coffee, the Cocoa market was hitting absurd new highs with no end in sight. 

 

On April 10th, a major broker dealer sued a Swiss-based Cocoa Trading company for failing to have sufficient capital for the hedges.  If it came to this, it is entirely possible (pure conjecture, not confirmed) that they had forced this same company to liquidate their hedges.  As a tradehouse (long physical, short futures as hedges), this liquidation would mean an immediate buying of many lots. 

 

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Regardless of whether this tradehouse was the catalyst or not, some stimulus triggered a large amount of buying that propelled the coffee market out of the technical range.  


 

This breakout was picked up by algo’s and speculators who trade momentum and breakout strategies.  Over the next couple of weeks, the spec reached record high levels in short order and made new high watermarks in terms of positioning.  This is an extremely tenuous situation for the bulls as the market requires new buyers to propel the market higher and they were not forthcoming.  With many longs in the market at high prices, this exposes the market to risk of long liquidation. 

  

Prices did indeed sell off, but it wasn’t actually the Managed Money Longs who sold.  It was the commercials and Other Reportables.  These small specs sold their longs and combined their selling with selling from producers in Brazil who had been holding back. 

  

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With no one buying to hold the market up, the market rapidly plummeted to the area where the rally first started just above the breakout.   

 This Friday, May 10th confirmed that the latest price action was sufficient to shake out some long specs as nearly 10k lots were liquidated. However, this merely brings us back to the pre-rally highs of 60k longs net so there is still plenty of room for additional selling. 

 

The question now remaining, is whether the hedge funds will continue to liquidate, and how much more selling will be triggered. 

  

Going forward 

Going forward, the question now is whether this spike was just a one-off last hurrah of the bull market, or whether this is a sign of more rallying to come.   


As part of our market forecasting methodology, we look at multiple paradigms: the fundamentals, the weather, technical, seasonality, and positioning. 

  

What makes the next move so obscure is that all of these modalities are very dynamic at the moment.  In the next article, we will examine these in detail along with our forecast. 

 

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