September 16, 2018, marked an important day in the world of coffee, when the New York C price for washed Arabica coffee fell below 100 cents per pound, reaching its lowest level in 12 years.
There is a bumper crop in Brazil of more than 60 million bags; Vietnam may end up with more than 30 million bags; and global output in the 2018/19 season may be over 170 million bags, which is 10 million more than consumption.
However, these fluctuations have been on the market’s radar for a long time, as the next harvest in Brazil will be lower, possibly by 10 to 15 percent, and some five million bags may be held back for next harvest. In short, supply and demand over these next two seasons is expected to be more or less in balance.
To understand the price collapse, we must look at the short term, where it is the funds that determine the price. In 2017, more than 9.4 million coffee contracts were traded on the New York futures market alone — equivalent to 2.7 billion bags of coffee, 16 to 17 times as much as global annual output. The futures markets outweigh supply and demand on the physical market in price setting.
On the Aug. 21, 2018, large speculators had a net short position — meaning to bet on a lower future price — of more than 106,000 contracts, or the equivalent of 30.1 million bags. With the 5.5 million bags short in London, that represented more than 20 percent of annual coffee production. On Nov. 8, 2016, when the steady downward slide began, the funds were almost 59 thousand contracts long, betting on a price increase.