Coffee price is enroute to retest the 7-year high it hit in mid-July. The demand and supply dynamics are behind the rallying.
Supply-demand dynamics
In the recent months, extreme weather conditions have affected the coffee crop. In Brazil, the leading producer of coffee in the world, the season has been characterized by frost and drought. The La Nina phenomenon expected in the near future may further lessen the expected crop as drought sweeps over the South American country.
The country’s food agency, Conab has lowered its estimates for this year’s Arabica production. The forecasted 30.7 billion bags is the lowest figure in 12 years.
Shipment delays have further impacted the supply and prices of coffee. The situation has particularly affected cargo from Vietnam and Indonesia. The two countries are ranked 2nd and 4th largest coffee-producing nations respectively.
The delays stem from the ongoing container shortages and surging freight costs. As a result, the backlog that started at the onset of the COVID-19 pandemic is expected to continue for several months.
At the same time, demand is rising as countries continue to ease COVID-19 restrictions. For instance, the US is set to open its gates for fully-vaccinated foreigners from November after a one-and-a-half-year ban.
Besides, Australia is expected to allow its vaccinated nationals to travel overseas from the coming month. Increased travels are forecasted to heighten demand for both instant coffee (Robusta variety) and the Arabica variety preferred in hotels and other establishments.
In the past year, soaring coronavirus cases placed 140 at an evasive level for Arabica ICE futures. In comparison, the soft commodity has been trading above that level steadily since May.
Coffee price technical outlook
The global benchmark for Arabica coffee – Coffee C futures – is just about 5.20% below its highest level year-to-date of 215.35. At the time of writing, it was up by 5.18% at 204.05 in the intercontinental exchange (ICE).
Since the beginning of the year, coffee price has surged by 62.99%. During the same timeframe in the past year, the soft commodity dropped by 19.70%. On a daily chart, it is trading above the 25 and 50-day exponential moving averages.
In the near term, it will likely hover around the psychological level of 200. A further pullback may place the support level along the 25-day EMA of 190.50 before bouncing back to above 200. As the month unfolds, coffee price will likely hit and surpass the year’s highest level. If that happens 225 will be the next target. However, this thesis will be invalidated by a move below the 50-day EMA at 185.
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