Spill The Beans

di Finanza Operativa 7 Agosto 2017 | 18:30

The US is currently flying high on debt, military spending and stock market records. It is due for a fall. Coffee beans are much more down to earth with prices that reflect supply and demand. A bountiful crop usually results in lower prices while drought or insects or plant disease brings about higher prices because of the scarcity caused by one or more of these factors.

Of course it is not all that simple. While drought in Brazil can be a problem, and it looks like this could compromise the next crop, too much rain in Vietnam, an important producer of robusta, and Indonesia can ruin a crop. Forex can also influence prices as can be seen from the weakness of the Brazilian real and Colombian peso against the US dollar, which has resulted in lower prices on the market. However, this can also cause a rise in prices because exporters will hold off selling when the dollar-denominated commodity fetches lower prices. On the other hand, if the Brazilian real shows some strength, this will be reflected in higher coffee prices.

Future prices for arabica on 31st July 2017 were at 137.85, the highest in 2 1/2 months. One should consider that computers now control at least 50% of the market and sell off or buy in accordance with algorithms.  Honduras produced a bumper crop last season, but the prospects of a repetition this year is unlikely as arabica plants tend to alternate from year to year in the amount that they produce. Some cases of coffee rust have also been found on trees that were thought to be resistant to the disease.

Another cause for changes in prices could be that funds that usually traded in coffee have siphoned off about US$ 25 billion from the coffee market. This would obviously result in a decline of demand on the market which could be offset by prospects of smaller crop yields for the coming season.

The influence of various factors on prices can be complicated. Movements on the Forex market mean that prices for commodities can rise or fall. Prospects for future crop yields will influence prices, and that will depend on the weather, insects and plant disease. Even so, if one takes these factors into account, supply and demand are the basis for the determination of prices.

This is not so for the stock market in certain cases. Quotations for Amazon cannot be justified by fundamentals. Facebook will never earn enough to improve its P/E ratio because there is just so much money in advertising. Bags of coffee can be counted and weighed, and people drink coffee.

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