No one appreciates a good cup of coffee more than we do, so when markets start to chatter about coffee prices dropping worldwide, we perk up.
Coffee prices on the open market have dropped 20 percent to 30 percent since the beginning of the year. Some of it is certainly due to the overall drop in commodity prices. Bloomberg’s Commodity Index has dropped almost 10 percent since mid-May. Indeed, declining commodities are becoming the latest excuse for markets to expect the Fed to stay on hold for the year, despite U.S. Federal Reserve Chair Janet Yellen virtually shouting to the markets that a hike will happen later this year.
Even more interesting is the corollary between coffee and our other passion – foreign exchange. About a third of all coffee in the world is produced in Brazil. Adding in exports from Vietnam get us to about half of the world’s production. We have mentioned a few times this year that the Brazilian real has been the worst performer among quasi-major currencies – down nearly 18 percent year-to-date.
Having that weak currency, however, means that Brazilian coffee producers, who are paid in U.S. dollars for their crops, can turn those dollars into a lot more reals to use in their businesses. Accordingly, they have ramped up production to try to take advantage of what they see as a temporary blip in their favor in the exchange rate. Of course, open global markets can be cruel, and not unlike the economic decisions that individual members of OPEC make on supplying oil to the market, actions taken by Brazilian coffee producers to make a little extra money can eventually come back to hurt them. The increase in supply has put downward pressure on coffee prices that has negated the gains from the U.S. dollar.
Like most people, we had hoped that the headlines on declining coffee prices meant that our daily low-fat, no-foam pumpkin-spiced latte was going to be a few cents cheaper. But as we all know, that has not happened. Part of the reason is that there are a lot more ingredients in those drinks than just coffee. But more than that, the reason is that large coffee retailers typically buy their coffee beans via multi-year private contracts that iron out the short-term volatility in coffee prices.
That’s too bad.
Our View: Coffee, commodities, and currencies all interact in the global market in surprising ways that touch our daily lives.
|The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.|