Coffee will be growing in price. Why?

Yesterday the price of July’s Arabica coffee futures in NYMEX reached $ 2,944 per pound, showing that the price wasn’t ready to consolidate above the $3.000/p. It should be reminded that on Wednesday the price reached $ 3,089/p, the highest price level over the last 14 years. Since 2010 the price on Arabica has nearly doubled.

At the moment the main driver for the uptrend is the news about a hailstorm in Brazil. Moreover, Brazil is expected to face light frosts, which can also affect the harvest.

Since the beginning of the year Arabica has increased in price by 24%. Kraft Foods Inc. and J.M. Smucker Co. had to increase the prices of their products after the price growth.

Last year Kraft Foods, famous for its «Maxwell House» coffee, increased the prices for 3 times. In February the company expected that in North America the expenses on the primary product would require extra $700-800M a year or 1.5% of the proceeds. Smucker (producing “Folgers”) increased the prices by 10% in February.

Taking into account the low volume of the global stocks and the growing consumption of coffee, there is little chance that the stocks will be filled up.  The consumption of coffee is currently growing faster in the exporting countries like Brazil, Ethiopia and Vietnam than in the importing countries. Brazil and Columbia will start the harvesting season in mid-May, which is expected to press the prices of coffee.

In long-term perspective, there will be a production increase at the expense of introducing more effective coffee-growing technologies. The farmers will probably refresh and expand the cultivation areas. The coffee exporters should take into account that the high prices we can see now won’t last forever even despite the fact that the demand keeps growing and supporting the market.

According to the Department of Commodity Trading, , the imbalance in favor of demand keeps supporting the prices. At this point the most probable scenario is consolidation around $3/p (a strong psychological level). A rally can be considered only after the price has consolidated above the mentioned level ($3/p).