Coffee prices are always highly volatile, influenced by various factors such as weather, politics, and the global economic situation. This volatility not only makes the coffee market attractive to investors but also presents many challenges in forecasting and risk management.

The relationship between supply and demand is one of the key factors that cannot be overlooked. The basic formula is: supply > demand = price decreases; supply < demand = price increases. This includes factors such as production levels, domestic consumption, and export volumes of producing countries; and global coffee consumption demand. These insights can be found in regular reports from USDA, ICO, and Conab.

Weather is also one of the factors impacting coffee prices. Typically, prices tend to rise due to harsh weather conditions such as frost, floods, droughts, pests, and heavy rains, as these issues reduce the coffee supply. Conversely, favorable weather can stabilize or lower coffee prices. Special attention should be paid to this factor in countries with leading production volumes, such as Vietnam or Brazil.

For example, the severe drought in the Central Highlands of Vietnam in 2016 disrupted the flowering and fruit-setting process, causing coffee trees to wither and die, making recovery difficult or impossible. This led to the dropping of young fruit, a reduction in yield, and directly resulted in a significant increase in Robusta coffee prices in 2016. Meanwhile, favorable weather conditions that contributed to a large harvest in Brazil in June 2012 led to a sharp drop in coffee prices.

Disease is also a factor affecting coffee production. Coffee rust is a disease that can devastate crops. Robusta coffee has higher resistance to rust compared to Arabica coffee.

The crop cycles of the world's leading coffee-exporting countries can also provide insight into price trends. A document indicates that Arabica coffee prices typically decline from July, as Brazil harvests coffee from June to July; meanwhile, in Vietnam, the harvest usually takes place in November-December each year, so Robusta prices tend to decrease from December.

One interesting point mentioned earlier is that the geographical location of coffee-consuming countries in the Northern Hemisphere also impacts prices, with summer occurring from June to September. Most of Europe, Canada, and the U.S. have their warmest days around mid-July or mid-August, so coffee prices adjust during these months.

Source: Internet

In addition, the increasing consumption of coffee in many countries around the world, particularly in emerging markets such as China and India, has also contributed to the rising demand for coffee.

Coffee prices do not only depend on the crop yield but are also linked to other factors. Studies have shown that coffee prices are related to oil prices; when oil prices rise, transportation and production costs for coffee also increase, leading to higher coffee prices. Conversely, when oil prices fall, production costs decrease, reducing the upward pressure on coffee prices.

The trade policies of major coffee-producing countries such as Brazil and Vietnam also significantly impact coffee prices. Implementing export support policies or import restrictions can alter supply and demand, thereby affecting prices.

In addition to oil prices, exchange rates are another crucial factor influencing coffee prices. When the US dollar strengthens, international coffee prices typically decline because coffee is priced in US dollars. Conversely, when the dollar weakens, coffee prices tend to rise. Analysts often use the USD Index (DXY) to measure the strength of the US dollar.

Apart from the USD, the euro is the second most influential currency in the world and has the largest weight (57%) in the USD index, which means that the euro's movements also impact the USD, and thus, the direction of the USD affects the direction of commodities.

Moreover, the appreciation of the local currencies of coffee-producing countries against the USD also affects prices. This weakens domestic coffee prices, reducing the sales volume of individual or organizational coffee producers, leading to a decrease in coffee exports, which in turn reduces the global supply of coffee; and vice versa. Brazil is the largest exporter and has the most volatile local currency, so the value of Brazil's currency will have a significant impact on coffee prices.

Source: Internet

Inventory data is also an important factor in the analysis and forecasting of coffee prices. Inventory data at specific times and stages in production areas, storage facilities, warehouses, and in-transit quantities help determine the global coffee supply. Typically, a decrease in inventory data leads to an increase in coffee prices, and vice versa, meaning coffee prices and inventory trends are inversely related.

Source: Internet

One can use the stock-to-use ratio to determine how much of the current agricultural product inventory can meet the demand for the year. This ratio typically moves inversely with prices.

Source: Internet

In addition, coffee prices are also influenced by other factors such as geopolitical issues. If any of the major coffee-producing countries like Vietnam, Brazil, Indonesia, or Colombia experience political instability, it can affect coffee production, leading to supply shortages and driving prices higher.

Since coffee futures contracts are traded on financial markets, financial speculation also plays a role in influencing prices. Speculators seek to profit from price differences rather than intending to take delivery of the actual commodity.

In 2023 and the first quarter of 2024, coffee prices surged due to several influencing factors, with the most significant being a decline in supply. According to recent market reports, coffee production in Brazil, the world’s largest coffee producer, has significantly decreased due to severe weather conditions, including drought and frost. This has put pressure on global supply and driven coffee prices higher.

Moreover, Vietnam is the second-largest coffee producer in the world and the largest producer of Robusta coffee. However, farmers are shifting to durian cultivation, reducing the area planted with coffee and thereby decreasing supply.

Additionally, the demand for coffee from major markets such as the United States and Europe is growing strongly after the COVID-19 pandemic. The economic recovery and the increase in coffee consumption in these countries have contributed to the rise in coffee prices. Major coffee chains like Starbucks and Dunkin' Donuts have reported significant sales growth, reflecting the increased consumption of coffee. In line with this trend, an article from Nikkei Asia mentioned that large companies in Europe and the US are shifting from premium Arabica, primarily produced in Central and South America, to the relatively cheaper Robusta coffee to cope with rising transportation and fuel costs.

Source: Compiled