Macro

Coffee Volatility Surges as Robusta Drops 2.7% Amid Supply Fears

Robusta futures dropped 2.7% amid Vietnam dryness, Arabica fell 2.6% influenced by Brazil's below-average rainfall.

By Barry Stearns

6/10, 12:38 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
article-main-img

Key Takeaway

  • Coffee futures experienced significant volatility due to supply concerns, with Robusta dropping 2.7% and Arabica falling 2.6%.
  • Dryness in Vietnam and below-average rains in Brazil are key factors driving price swings, with a 60-day measure of volatility near its highest since 2008.
  • Money managers' long positions could pressure prices short-term; Arabica fell to $2.2170/lb and Robusta declined by 1.3%.

Coffee Futures Volatility

Coffee futures experienced significant fluctuations in both New York and London markets, driven by persistent supply concerns. Robusta futures in London dropped as much as 2.7% on Monday before oscillating between gains and losses. Similarly, Arabica futures in New York fell by as much as 2.6% before paring some of the declines. This volatility is largely attributed to ongoing dryness in Vietnam, the top exporter of robusta coffee, which has kept a 60-day measure of price swings near the highest levels since at least 2008.

Daria Efanova, head of research at Sucden Financial, noted in a Monday report, "While we expect the near term to remain bumpy, our longer-term forecast remains moderately bullish." The volatility in Arabica coffee is also influenced by below-average rainfall in Brazil, the leading supplier, and increased speculative demand following a crunch in the cocoa market. Efanova added, "A lot will hinge on weather patterns in the coming months. We remain cautious about potential heat waves and heavy rains that could significantly alter arabica’s and robusta’s price narrative."

Speculative Demand and Market Dynamics

The coffee market has seen a surge in speculative demand, particularly in Arabica coffee, following disruptions in the cocoa market. This has added another layer of complexity to the already volatile market. Money managers have recently accumulated long positions in coffee, but their future moves could exert downward pressure on prices in the short term. Marcelo Moreira, a coffee market analyst at Archer Consulting, highlighted that investors are closely monitoring the upcoming expiration of July Arabica options on Wednesday, which has a large open interest for some put options.

The speculative activity and the looming options expiration are critical factors that could influence short-term price movements. Moreira's insights suggest that while the market is currently buoyed by speculative demand, there is a potential for price corrections as these positions are unwound.

Price Movements and Market Reactions

As of 12:21 p.m. in New York, Arabica coffee prices fell by 1.4% to $2.2170 per pound, while Robusta coffee prices in London were down 1.3%. The broader commodity market also saw declines, with cocoa and raw sugar retreating in New York. These price movements reflect the broader market's reaction to the ongoing supply concerns and speculative activities.

The market's sensitivity to weather patterns in key coffee-producing regions like Vietnam and Brazil remains a significant factor. Any adverse weather events, such as heat waves or heavy rains, could further exacerbate supply concerns and add to the volatility. Efanova's cautious outlook on weather impacts underscores the importance of monitoring these developments closely.

Street Views

  • Daria Efanova, Sucden Financial (Moderately Bullish on coffee market):

    "While we expect the near term to remain bumpy, our longer-term forecast remains moderately bullish."

  • Marcelo Moreira, Archer Consulting (Cautiously Optimistic on coffee market):

    "Money managers piled up long positions in coffee recently, but their moves from now on could create some downward pressure to prices in the short term."