Trade Jitters

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By Dan Bolton

Economists worldwide agree on one thing: no one can confidently predict what comes next. Trading in commodities last year was anything but typical. Coffee escaped the fate of soybeans and corn but volatility remains unsettling with recent lows not seen in almost 15 years.

It is now apparent that growth is decelerating globally. China, Europe, and much of Asia, including India, are experiencing headwinds of varying intensity. Uncertainties from Brexit to recent political upheaval in Central and South America are giving coffee traders the jitters. The biggest concerns include:

• Trade war. US tariffs on all Chinese imports could jump to 25% as early as March with retaliation and escalation to follow. Currently, 62% ($360 billion) of bilateral trade between the world’s two largest trading nations is arbitrarily (and many say unnecessarily) expensive.

•  Monetary policy. An unexpectedly strong dollar, resulting from US Federal Reserve attempts to maintain stability and job growth distorts the coffee market. Currencies pegged to the dollar suffer while those that are not do not benefit. The dollar climbed 4.3% in 2018, about double that of the best of 16 currencies but unlikely to repeat in 2019.

•  Record yields of arabica replenish ending stocks and robusta rebounded. Production is estimated at 167.4 million 60-kilo bags in 2018/19 (April 2018-March 2019) creating a 2.29 million bag surplus globally that pits growing demand in domestic markets against export.

•  Unbearably low coffee prices on the Intercontinental Exchange (ICE) were compounded by technical trading as speculators used the futures market as a tool for currency hedging, complex derivatives, and other investment strategies.

Coffee volatility

Volatility is price variance experienced over time. Financial markets last year rode a scary roller-coaster with massive swings, a greater number of large moves, and more big surprises than at any time since 2008.

But financial markets were tame compared to commodities.

Since 1970 quarterly coffee volatility has ranged from 11% to more than 90%, according to The Balance. In contrast, equities ranged from lows of 5.35% to highs of 27.23% following the 2008 financial crisis.

Through the 10 years ending in May 2016, against 21 commodities, coffee’s historic volatility averaged more than 31%, slightly behind wheat and sugar, both of which are near 34% —but far greater than corn, which trades in a historical range of 12-48%. Soybeans normally range from 10% to 75% but when China abruptly turned to other suppliers, American farmers saw a 40% decline in orders. Statistics assessing the financial damage are delayed due to the government shutdown.

Bull markets generally encourage trades and in 2018 overall volume on North American exchanges rose 18.8% to 10.56 billion contracts, equivalent to 34.9% of worldwide volume, according to the Futures Industry Association. Volume on European exchanges rose 6.7% to 5.27 billion contracts, equivalent to 17.4% of worldwide volume. Expect a similar level of intensity in 2019.

Brexit

In Britain, coffee roasters are stockpiling green coffee amid concerns that exiting the European Union in March will have a “devastating impact” on trade.

Industry leaders say that “deep uncertainty” due to Brexit is negatively impacting trade, threatening 20 years of consecutive growth in a market valued at $13.2 billion, according to Project Cafe UK 2019, a report by Allegra World Coffee Portal (WCP). “Economic turbulence” is slowing growth at the nation’s 25,483 coffee shops to 5% this year, down from 7.9% in 2018. “The political impasse over the last 18 months has contributed to growing anxiety on labor shortages, rising prices, investment, and eroded consumer confidence,” according to WCP.

Findlay Leask, director at Cabel Coffee, laments the “substantial capital” spent on “mitigating the devastating impact a hard Brexit will have on Cabel Coffee.” In January he told a local newspaper, “If we are to leave Europe to commence trading on WTO [World Trade Organization] terms, it would be extremely pragmatic to allow business and industry more than three short months to prepare effectively.”

That clock has now expired.