What Does the Drought in Brazil Mean for Coffee?

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Brazil Drought? Well, coffee bulls have not reacted as if there is a drought. U.S. coffee prices have continued to move lower for last two sessions, sending prices to a five week low.

[caption id="attachment_62113" align="alignright" width="300"] Image courtesy D McAbee: http://morguefile.com/creative/mrmac04 Coffee tree beans[/caption]

Arabica coffee dropped 1.10% today, pushing prices to the April 4th low, the lowest price per pound before the start of the April 23rd (a 26 month high) bull run fueled on fears of supply and demand being lopsided where producers wanted to capture the high prices.

So why the drop in price?


Supply and demand. When prices were climbing, coffee roasters (producers) look to take advantage of up selling the consumer. We can see this effect in January - April 15% increase in Brazil's exports vs. the same window last year.  Now that the producers have taken in all the unroasted coffee beans they can handle, demand has begun to drop off and it's showing in the price action.

So where is the price heading?

Here's where it gets interesting. The increase export demand was met with existing inventory.  What you have to realize is the coffee bean picking season did not start until April.  We may very well see another lopsided supply and demand due to the drought in Brazil.

It's time to put coffee on your watch list. I personally only play the coffee market through the ETF/ETN vehicles.

iPath Dow Jones-AIG Coffee Total Return (JO)

iPath Pure Beta Coffee (CAFE)



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , International , Stocks

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