Soft Commodities Year In Review: Coffee Surged While Cotton Wilted

January 06, 2015

Cocoa and sugar underperformed.

 

Coffee

Coffee prices, as measured by the ICE futures contract (KC), finished the fourth quarter of 2014 at $1.66 a pound, down 38 cents, or 19 percent on the quarter. However, for the year, coffee prices are up 51 cents a pound, or 45 percent, making coffee one the best-performing soft commodities.

The coffee market exploded in late January as a result of dryer-than-normal conditions in Brazil's coffee-growing areas. Prices rallied from $1.10 a pound to more than $2.00 a pound in a matter of weeks. For the balance of 2014, prices moved in a wide sideways pattern between $1.60 and $2.20 a pound.

For almost the entire year, coffee futures were a weather market, responding to Brazilian rainfall—or lack thereof—and to a wide range of crop estimates.

Brazil typically accounts for around one-third of total world production. The harvest in Brazil begins in April. Of primary concern was the effect of a drought on the 2014 crop, and secondarily, the potential impact on the next year's 2015 harvest.

In its latest report in December, the USDA estimates total world production for the 2014/2015 crop year ending September 30 to be 149.8 million 60 kilo bags. Brazil is expected to produce 51.2 million bags. The USDA estimates that drought reduced Brazil's crop by only 3.3 million bags, and that globally, much of this loss was made up by increased production out of Colombia and Central America.

The USDA expects world total ending stocks for the 2014/2015 season to be 36.4 million bags. Typically, year-end world stocks of around 35 million 60-kg bags or higher are considered ample. Stocks of between 25 million to 30 million 60-kg bags are considered tight and usually result in higher prices.

Money managers are currently net long 27,000 lots compared with net long 42,000 lots three months earlier. Index funds have been long almost all year, but are expected to continue to rebalance their position by reducing longs in January.

 

Coffee Year-End 2014

 

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