There was strong coffee output in Brazil over the course of the past years, this’s especially true when it comes to the last season of Arabica’s production. The coffee market has entered a deficit a few times mainly on the back of a decline of Robusta’s output. However, the lower output of Robusta, the higher demand for Arabica. On that account, even as there was a glut of Arabica, inventories tended to decrease then.

As for now, there are two key factors which could bode well for coffee prices. First of all, stocks are low, at the same time, there are expectations they will continue shrinking to the lowest levels for years. Secondly, the speculative positioning is already remarkably low. 

Taking a look at the balance of coffee market, assessed by the USDA, there is simmering oversupply in case of green coffee (both Arabica and Robusta) lasting for almost 10 years. On the other hand, a period of a strong glut of coffee which led to a decline in prices at the turn of 2012 and 2013 is already behind us. Although, there is an improvement in fundamental metrics, coffee prices remain relatively low. Because of higher Brazilian output of Arabica, prices have decreased to $1.2 per pound.  

Even as the balance has improved, coffee prices have not rebounded as of yet. Source: Bloomberg, XTB

The latest USDA’s forecasts point to a decline in inventories to the lowest levels since 2011. It stems partly from the fact that coffee’s export from Brazil remains high while stocks in other coffee producers are consumed as well. Quicker pace of declining stockpiles could have been seen especially in Asian countries as they wanted to remove some of stored coffee when prices were relatively high. 

Coffee stocks are forecast to decrease and support prices. Source: Bloomberg, XTB

Nonetheless, it’s worth looking at stocks along with consumption which has been rising of late. Given so low prices of commodity, further increases of consumption should be continued. This’s especially true when we factor in a shift of preferences in Asian producers as it could deliver a boost for prices going forward. 

Despite a rise in the stocks/consumption ratio, prices have not responded as of yet. It could be explained by additional supply in case of Brazilian export as well as intact export in Vietnam or Indonesia. Source: Bloomberg, XTB

Consumption has been rising for a few years. In turn, anticipations of higher consumption  in South America could improve the medium-term outlook. 

Global consumption has been rising for a few years and there are expectations to continue this trend. Source: Bloomberg, XTB

There is a rebound in global output this year. The best season was seen in case of Arabica, the overall balance which we present below isn’t so bad though. It seems that momentum of demand growth exceeds impetus of supply growth. Yet another bullish signal can be noticed when we look into the future as there are estimations of a weaker season for Arabica in Brazil and further production issues in Asia. 

An increase in coffee output isn’t significant what could bode well for prices. Source: Bloomberg, XTB

One of the most important issue which could support prices is the speculative positioning. Extremely low positioning is often seen as a contrarian signal and could lead to a turnaround in prices. We experience that kind of scenario in case of coffee, so one could assume that even a tiny fundamental signal could lift prices. 

The net positioning in coffee has decreased to extreme levels and is already close to the levels seen in 2013 or 2016. The current consolidation in positioning could be a foundation to a rebound in prices. Source: Bloomberg

Taking into consideration current stance of fundamental metrics a decline below $1.1 per pound appears to be unlikely. The key support zone which could provide a rebound in prices is placed at $1.2 per pound. Having said that, prices remain within a strong uptrend, hence a temporary consolidation should occur and, at the same time, speculative investors should change their mind regarding positioning in order to prop up prices.

Prices remain within a strong uptrend just above the strong support zone. A consolidation scenario (similar to that seen in 2015 and 2016) cannot be ruled out. Source: xStation5