“Inflation and the Finite endgame” Coffee prices: Rising oil, stagflation, supply chain issues and a strengthening Brazilian currency post-2021 South American drought, may lead to 2011 coffee prices.
When I first looked at the coffee price in June 2021, written in this post “Inflation and the Finite endgame” Coffee prices and climate change. On June the 28th the price was $1.62 (Ibs) after the 2020 supply crunches from COVID-19, it was the drought in South America, more so Brazil which started in 2020, that was indictive of climate change playing havoc with the shipping routes which is the Paraguay River narrowing and becoming shallower. Thus dredging and widening of the river had added to the costs of exporting coffee. The coffee price since then (Chart 1) has continued to rally, spiking over 30% in July 26th 2021 and up over 90% from its April 2021 lows, closing at $2.58 on the 9th February 2022.
Attributing to the squeeze on coffee prices is the rally in the Brazilian real (BRL), with a history of out of control inflation, the Brazilian central bank has raised its rates to 10.75%, which in turn caused the BRL to rally, making exporting less attractive for Brazilian coffee, contributing to price increases in the coffee futures market. Refer to the BRL chart below the coffee price, note the trend lines as the BRL rallied from the 2nd February 2022 Central Bank decision, lifting the currency from its March 2022 support of 0.186, now comfortably trading between 0.190 and 0.195.
This rally in the BRL has assisted in the coffee price to trade over its $2.10 support (red line). With the invasion of Ukraine by Russia and the effect that it has had on the oil price, refer to Chart 2, the yellow line represents the NYMEX oil futures which are bid. Although it hasn't correlated to the increase in the coffee price since May 2021 when coffee began to rally, we are now seeing a connection to the tightening of oil supplies ala Russian sanctions and the increases in coffee prices since February 2022, which will lead onto higher prices for coffee exporters.
Bonus Chart, shows coffee in May 2011 blowing out to $3 a Ibs, this spike due to crop failure, draught, increased fuel costs and a weak U.S. Dollar. The difference with the dramatic price rise in 2011 compared to now, is that the rising costs do not seem like a market abnormality, rather, it is an indication of the norm that is global stagflation. Rising costs, slowing demand.
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