will the 6-month support hold with the expected surplus?

Coffee price has been trading above the psychologically crucial level of $200 cents/lb since November 2021 as demand for the agricultural commodity strengthens. Even so, it is yet to hit the pre-pandemic levels. The predicted surplus, coupled with eased concerns over frost in Brazil are the key bearish drivers.

What’s behind coffee price movements?

A report released by Rabobank on Friday indicated that coffee demand in non-producing nations had a healthy recovery in Q1’22. Even so, it is yet to reach the pre-pandemic levels. the recorded figures are only 0.6% higher than in Q2’20.   

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COVID-19 lockdowns in China and the Russia-Ukraine war remain the key downward risks of coffee demand. Indeed, Rabobank forecasts that the demand of this commodity will decline by 25% and 50% in Russia and Ukraine respectively. Besides, it predicts a shift from the recorded deficit of 5.1 million bags in the 2021/22 season to a surplus of 1.7 million bags in 2022/23. The expected surge in supply has weighed on the commodity’s prices into the new week.

Eased concerns over frost in Brazil have also curbed coffee price gains. Mid-last week, the benchmark for Arabica coffee – Coffee C futures contract – hit a three week high following the frost experienced in key coffee-growing areas such as Parana, Sao Paulo, and Minas Gerais. Investors were concerned that the below-average temperatures  will result in intense crop damage and decade-high prices as was the case in 2021. However, Rural Clima has eased those fears by indicating that the resultant crop damage is minimal.

In the new week, the value of the US dollar will also impact coffee price. As is the case with other commodities, coffee price tends to move inversely to the greenback. As at the time of writing, the dollar index was at $102.08; its lowest level in about four weeks. As the week unfolds, the currency will be reacting to the durable goods orders, PCE price index, and the Fed meeting minutes.  

Coffee price technical outlook

Coffee price has edged lower in early Monday trade despite the bullish demand outlook. On a daily chart, the agricultural commodity is trading below the 25 and 50-day exponential moving averages.

In the new week, I expect the price to remain above the psychologically crucial level of 200 as has been the case since November 2021. In the short term, the range between 210.75 and 222.20 will be worth watching.

As the week unfolds, the bulls may get an opportunity to retest last week’s high of 229.45. On the flip side, a pullback of BRLUSD and/or revived concerns over frost in Brazil may have it drop to a two-week low of 202.45.