This Year's Biggest Loser: Coffee Futures

It's not just supply and demand. The coffee market is under pressure from the broader downtrend in the commodity arena, concerns about a Chinese economic slowdown and what, if any, spillover impact that could have on global gross domestic product (GDP) and, in turn, on global commodity demand.

Don't discount the dollar. Another major factor driving ICE coffee futures lower this year are currency market dynamics. Brazil is the world's largest producer and exporter of coffee. The U.S. dollar index has gained about 8% on the year. But, its performance against some emerging market currencies have far outpaced that rate. Versus the Brazilian real, the U.S. dollar has surged 41% through mid-November.

What does that have to do with the price of coffee futures? Brazilian exporters are eager sellers of their coffee stockpiles and inventories as they rake in huge currency profits selling coffee on the world market priced in strong dollars.

"We are seeing a constant supply of coffee moving onto the cash market. The strong dollar is giving exporters incentive to keep the market well supplied," said Terry Roggensack, analyst at the Hightower Report in Chicago.

The attractive exchange rate for Brazilian exporters is ensuring a lack of physical tightness in the coffee market currently which, in turn, depresses coffee futures prices. "Supply is the biggest issue—there is abundant supply available," Roggensack said.

However, actual global coffee production fell short of demand last year and analysts predict another shortage ahead for the 2015-16 year. Global coffee production is estimated at 143.25 million bags in 2014/15 versus global coffee consumption at 149.2 million bags for calendar year 2014, according to International Coffee Organization (ICO) data.  

While coffee prices are low now and exporters have been able to keep the market well supplied out of inventories, industry experts and leaders are warning about the potential for a coffee shortage in the years ahead, especially as emerging market consumption increases.

Andrea Illy, the chairman and chief executive officer of Italian coffee roaster Illycafe SpA, warned recently that rising coffee consumption over the next decade means global production would have to increase by 40 to 50 million bags to ensure a balanced marketplace. That is roughly the amount of coffee Brazil produces each year right now.

Technical chart outlook. With coffee futures prices down 35% through November, what does the chart outlook show now? One strategy commodity futures traders employ is so-called trend trading. For now, the trend remains firmly bearish for ICE March coffee futures seen in Figure 2. Lower daily highs and lower daily lows have emerged over the past year. The March coffee contract is trading below its 200-day moving average line, shown in red, which is considered the proxy for the long-term trend outlook. It would take a sustained rally above the 200-day moving average to improve the longer-term trend outlook for coffee.