Coffee is in little need of a pick-me-up.
Prices for arabica beans have risen 39 percent over the past year, making them the best-performing member of the Bloomberg Commodity Index after orange juice, sugar, zinc and tin. But there's a funny thing about caffeine: Just when you think you're worn out, a quick shot can give you the energy to push a bit further.
That's certainly what hedge funds and traders are betting. Non-commercial investors last week increased their net long position in U.S. coffee futures by almost one-third from the previous week, pushing the wager on rising prices to its strongest level since 2008.
There's a simple explanation for this. The world has been consuming more coffee than it's been producing for two years straight, and while there's still a viable market for some alarmingly old beans out there, sooner or later inventories built up in fatter times start to shrink.
Stocks of arabica beans in warehouses monitored by the Intercontinental Exchange fell earlier this month to their lowest level since March 2000. Having held inventory equivalent to about seven days' global consumption as recently as September 2013, the warehouses now have just three days'-worth on hand.
It's normally a sound bet in commodity markets that when prices rise and stocks are low, producers will step in to balance things out. There's reason to make an exception in this case, though.
On one side, you have a global population whose thirst for a morning stimulant appears to be unflagging, with demand set to hit a record this year. In a contrast to the situation with most other commodities, coffee's strong fundamentals don't even get much lift, yet, from the China factor -- consumption in that tea-drinking nation totals just five or six cups per person, per year. That's rapidly changing, though, with demand growing at 16 percent a year over the past decade.
On the other side, you have a supply situation that's been struggling to keep up. While global consumption has grown 4.1 percent over the past three years, according to the International Coffee Organization, production of caffeine-heavy robusta beans is up only 4.8 percent and that of the more fine-flavored arabica is down 6.2 percent.
Those factors look set to continue. The Cooxupe cooperative, the biggest coffee exporter in the world's biggest coffee producer, Brazil, last week cut its export forecast by about 500,000 60-kilogram bags due to drought in its main robusta-producing region. Weather problems have also hurt Africa's biggest exporter, Uganda, for three years running. In Vietnam, the biggest robusta producer, output is projected to fall more than 20 percent over the coming 12 months after crop failures reversed a bumper performance earlier in the year.
Professional commodity forecasters seem optimistic the market will rebalance, with the median analyst seeing arabica at about 143 cents per pound by the end of 2017 and robusta at $1,744 a ton, well down from current levels of 165.5 cents and of $2,187 respectively. Futures markets disagree, suggesting prices will rise further for both varieties well into 2018.
That gives coffee the biggest divergence between analysts' and traders' forecasts among major agricultural commodities, meaning plenty of opportunities for investors to take either side of a contentious trade. Both risk and reward look high -- and pressure always did make for a good espresso.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Arabica makes up about 60 percent of the world's coffee production but higher-quality blends use less of the bitter robusta bean and are typically more than 80 or as much as 100 percent arabica.
The category includes all commodity traders who aren't either involved in the physical trade as producers, merchants, processors or users, or swap dealers whose main business is hedging price risk for physical-trade clients.
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