Coffee Price On The Cusp Of Multi-Year Breakout As Supply Dries Up

Summary:

The Coffee price may be about to surge. Contract disputes in Brazil are the latest issue facing a market already struggling to meet demand.

The Coffee price may be about to surge. Contract disputes in Brazil are the latest issue facing a market already struggling to meet demand.

The covid pandemic has already wreaked havoc on the global coffee supply. The flow from major exporters has dried up as congested shipping ports struggle to process the abundance of incoming container ships.

Adding to the problem has been this year’s drought in Brazil. Potential losses from the drought could affect up to 50% of the countries 2.6 million ton annual production.

This has left the market woefully undersupplied and forecast to be in deficit by 10.7 million (60kg) bags this year.

The Coffee price is up 20% so far in 2021 to $1,606, the highest since 2018.

Farmers renegotiate

The rising price has resulted in Brazilian farming unions rush to renegotiate contracts with exporters. This dispute is likely to add to the already struggling supply.

Farmers, already hit with lower crop yield, are desperate to secure a higher price for their production. Should negotiations fail, the threat of defaults will be facing the market. Exporters may then be forced to source supply from the spot market, which could push the coffee price even higher.

Coffee Price outlook

The weekly chart shows a confluence of bullish indicators. Since the $1,073 low in April 2020, the market has remained in a strong uptrend. In April this year, the price pulled back to the support of the ascending trend line at $1,322.

Reinforcing the support level was the 50 and 100 weekly moving averages at $1,324 and $1,321. This triggered a 20% rally to the current price and well clear of the 200 WMA at $1,500.

The price has now run into a good area of resistance. A rising trend line from May 2019 capped last week’s rally at $1,602. Nonetheless, Coffee futures finished the week +7.10% higher at $1,583.

Considering the supportive supply issues and the improving technicals, this resistance may be temporary.

A continuation of last week’s momentum would lift the price out of this formation by Friday. Should this happen, I would expect to see buying from both speculators and the trade that desperately needs supply. This could lead to a perfect storm for the coffee price.

Until this weeks candle is formed, the price remains within the trend. The end of this weeks trading may have repercussions for the coffee price for quite some time.