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Saturday, October 6, 2007

Coffee futures: an historical perspective

Over the last 20 years coffee supply and demand have never been balanced producing wild prices swing and volatility in the coffee market: below the historical price of the nearby coffee futures contract traded on the NYBOT (Arabica coffee).

A situation of oversupply kept coffee prices very low for the beginning of the nineties, tighter supply conditions in 1993-1994 lifted the prices from 0,5 per pound to over 2 USD per pound.

A price spike up to 3 USD per pound in 1997 due to supply disruptions was followed by a 5 years of bear market driving the prices as low as 0,45 per pound in 2002 (the so called coffee crisis).

The rising production of Brazil and the rapidly growing Vietnamese supply kept the priced depressed till 2004. The chart below shows the annual production (in 60kg bags) of the three main coffee producing countries.

The oversupply condition that depressed the coffee market for almost 10 years has recently been removed from the market thanks to rising coffee demand in the importing countries and slowing supply rates of growth in some producing countries. Prices have now returned to over 1,3 per pound (the highest level of the last 9 years), however the effect of the weak dollar have reduced the benefit of higher dollar prices of coffee for most of the producers. The chart below shows the annual consumption (in 60kg bags) of the three main coffee consuming countries.


Production and consumption data on green coffee (source FAO) in the chart below show the contraction of the world surplus of coffee that has driven prices higher over the last few years.

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