Coffee in the morning!

Updated

is the second most imported commodity in the world, after oil. Looking at the charts, it might strike one as a commodity that is just bumbling about, at least on shorter time frames, often at a slow pace. However, reality is that it is highly volatile, and prone to huge fluctuations in price. As an example, the price of Arabica is up 80% the last year. This followed a 50% drop from Feb 22 to Jan 23. In terms of relative volume, it is also one of the most traded commodities all over the world. So what drives prices, and what are the major deciding factors of this brown delight?

As for most commodities, supply and demand are key. Brazil is the undisputed largest producer, with close to 40% of global supply. Other top producers include Vietnam, Colombia, and Ethiopia. The two major types of coffee are Arabica and Robusta, with Arabica being the “prime” coffee. This is because it is much more delicate and needs more specific cultivation requirements, such as weather and altitude, to grow. It is also more prone to plant disease due to this, such as Coffee Leaf Rust.

Weather conditions (such as frosts or droughts) heavily affect coffee-producing countries (like Brazil), and this can send prices skyrocketing. Because most of the coffee production takes place in developing countries, political instability and social unrest are also huge, potential factors in the supply of coffee. Add to this logistical challenges, and the price of shipping in such high volume, not helped by Covid which is still impacting shipping and the cost of shipping, all leading to higher prices. And still we have not touched financial speculation (yes, you and me.) and trader/analyst predictions. Coffee futures are traded many places, the two majors being ICE in New York (Arabica) and LIFFE in London (Robusta). These two decide the price, known as the C price. Price, as in the price of coffee.

Earlier we touched on supply and demand, which is the sort of hamster wheel driving prices. Demand is rising, but on the flip side of this, the Russia-Ukraine war has affected demand (as it has so many other things). Russia is the sixth largest coffee consumer, and due to sanctions demand has been dampened. We all hope this war is temporary, so an end to it, I suppose depending on the outcome, could spark demand again. Another factor is a switch in demand from Arabica to Robusta. This is a lower priced bean, and in some of the worlds largest countries (China, India, Pakistan), there are signs of a switch in demand to Robusta. This is 40% of the world population but will of course take some time to affect market and prices.

Chart: Like I said, price seems to bumble about and has for a long time kept within the boundaries of a rising wedge (Daily and 4H). Price has now surpassed the previous long-term high of $2.59050 from Feb 22, with a new high of $2.59326. Depending on how far you want to go back, there is no clear resistance ahead. As price has oscillated inside the range of the wedge for the last 5 months, one could expect a drop towards the $2.45 area, before turning up again. The 50EMA is steadily moving up above the 100EMA. As always, wait for a confirmed break of channel before going long. Or, short the return to base line, if you feel that is the immediate move.

Note

Price has clearly broken up from the channel, and trend is still looking strong. There is no indication of a break of trend, EMAs are diverging and other indicators confirming. Keep an eye on RSI for a potential change.

Note

Price corrected down to the channel bottom, but has started gaining again. On the daily chart channel, the bottom line has decreased its upward slope due to this, and has now formed parallel channel boundaries. Price has bounced from the bottom, and started moving in the direction of the longer trend. There has been severe droughts in Brazil, affecting several commodities, which might help push prices further.

Trade closed: target reached

After the recent surge, I close the trade to secure a very nice profit!

WeRideAtDawn

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