#008 - What Are Coffee Prices Telling Us?

renatostivanin
Jan 25
2 min read

Updated: Jan 26

During these unique moments, information is more valuable than ever.

We would rather be writing about the flavour and quality of our beans from Brazil. Maybe better, we would like to talk about the impact on the environmental and local communities.

However, positive impact starts with access to information. This theme is important.

Each commodity has its futures curve, traded on exchanges such as ICE. Under normal circumstances, shorter contracts have lower prices than longer contracts. So that arbitrators can profit by:

buying the shorter contracts (lets say delivering in 1 month)
paying carrying costs (such as insurance, warehousing and capital costs)
selling the longer contract (lets say delivering in 6 months)

That is good for business.

The problem is that coffee futures have been inverted for a while.

When short-term prices rise due to supply restrictions, longer-term contracts tend not to follow, creating a negative premium for carrying that commodity.

It simply becomes too expensive to hold inventories.

In the case of coffee, international traders are not taking the coffee from producing countries to consuming countries. Inventory levels in Europe are reaching the lowest levels ever. Meanwhile, producers are holding an unsustainable level of inventory, exposed to several unbearable risks - such as robbery.