Coffee hits a 6-month high; Golden Cross incoming?

On December 11, coffee prices experienced a significant rally, with robusta reaching a three-week high. The price surge is attributed to concerns about potential crop damage due to dry weather in Brazil.

The Minas Gerais region in Brazil received only 36.5 mm of rainfall in the past week, representing 53% of the historical average. Notably, Minas Gerais contributes to approximately 30% of Brazil’s arabica crop, according to Monday’s report from Somar Meteorologia.

Prices may face downward pressure due to rising global coffee exports, as the International Coffee Organization (ICO) reported on December 9. The worldwide coffee exports for October increased by 0.9% year-on-year, reaching 9.53 million bags. 

These conditions have impacted the rise in the value of coffee, which peaked on December 13, reaching its 6-month high.

These conditions have paved the way for the possible emergence of the golden cross in the coffee price chart. A golden cross occurs when a shorter-term moving average crosses above a longer-term moving average on a price chart. 

This pattern is considered a bullish breakout, resulting from the crossover of a commodity‘s short-term moving average (like the 50-day moving average) rising above its long-term moving average (such as the 200-day moving average) or a significant resistance level.

Weather is a key factor in coffee prices

Coffee prices thrive on bad weather, such as drought, weather storms, and other conditions that may negatively impact the production of coffee, thus reducing its supply and increasing its price.

Coffee prices surged on Monday, driven by concerns of potential crop damage from dry weather in Brazil, especially in the Minas Gerais region, a key contributor to Brazil’s arabica crop. Additionally, Vietnam reported a significant monthly increase in November’s robusta coffee exports, but year-on-year figures were down. Vietnam’s agriculture department also projected a 10% drop in coffee production for the 2023/24 crop year due to drought, reaching the lowest level in four years.

However, in what might be bad news for coffee prices but good for its consumers, the USDA’s FAS anticipates a 2.5% increase in global coffee production for 2023/24, totaling 174.3 million bags. This includes a 6.9% boost in Arabica production to 96.3 million bags and a 2.4% decline in robusta production to 78.0 million bags. 

Brazilian coffee production is forecasted to rise by 14.5% to 67.9 million bags, while Vietnam’s is expected to fall by 3.5% to 30.2 million bags. The projection for ending stocks in 2023/24 sees a slight uptick by 0.8% to 31.8 million bags from the previous season’s 31.6 million bags.

These factors will increase the supply of coffee worldwide, flooding the market with excess of this commodity, which in return will lower the prices.