May 25, 2023

Coffee price forecast: El Nino is a catalyst but caution is needed

2023-06-07 03:35:00 ET

Coffee price has done well in 2023, making it one of the top-performing agricultural commodities this year. Cash contracts are trading at $183, ~30% above the lowest level in 2023. In contrast, commodities like soybeans, wheat, and corn have all slumped recently.

Coffee prices have a major catalyst that could push them significantly higher in the coming months. If weather forecasters are right, many parts of the world will have El Nino this year. In a statement on Tuesday, Australia's weather forecasters predicted that chances of an El Nino are 70%.

Past El Ninos have had a negative impact on the economy. In some places, record high rainfall destroy agricultural products and cause droughts. Sine El Nino is accompanied by La Nina, other parts of the world experience heat records, leading to famine.

In a report this week, Fitch said that El Nino will affect some of the biggest producers of coffee like Indonesia and Vietnam. Vietnam is the second-biggest coffee producer in the world, producing over 1.5 million metric tonnes per year. Indonesia is the fourth-biggest producer. The report said:

"The now widely-expected transition to El Nino conditions in Q323 has stoked fears of reduced output in Vietnam and Indonesia, both major coffee robusta producers."

Other large producers of coffee like Brazil and Colombia will also be affected if this weather phenomenon happens.

At the same time, coffee price has risen because of a drought that is happening in Brazil, which sells millions of tons of coffee every year. The drought affected some of the coffee planting regions.

Meanwhile, the recent report by ICO showed that coffee exports dropped in April. South America's exports fell by 6.4% while Africa declined by 9.8%. Asia and Oceania exports dropped by 1% while from Mexico and Central America rose by 1%. In all, coffee production dropped by 1.4% in 2021/22 while consumption jumped by 4.2%.

Coffee prices peaked at about $260 in February 2022 as concerns about supply continued. It then plunged to a low of $142 in January this year. Coffee has therefore been in a recovery mode this year. This recovery saw it find resistance at $205.98.

On the daily chart, the price is hovering near the 25-day and 50-day exponential moving averages (EMA). It has also formed what looks like a head and shoulders pattern, which is usually a bearish sign. Coffee is also stuck slightly below the important resistance point at $193, the highest point on February 23rd.

Therefore, at this stage, I believe that coffee prices will remain in a consolidation phase as investors watch weather changes.A drop below the key support level at $167 will imply that there are more sellers willing to push prices to the YTD low.

On the other hand, a move above the $206 level will invalidate the head and shoulders pattern and push it to $220.

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