Coffee futures have shown a significant drop in the past three weeks. This was a result of the worst drought incident in several decades in Brazil, the largest producer and exporter of coffee in the world. But things are beginning to pick up, as more than average rainfall is expected in the major regions that produce coffee, including Southern Minas Gerais, Espirito Santo, Rio de Janeiro, and Sao Paulo.
The recent drop in coffee futures has highlighted increased swings in the market. In mid-Match after price reached its highest level since 2012, forecast for rain provoked the largest 2-day selloff since 2010, which was preceded by a rebound to another new high on April 11. Rain has been the major factor that has affected coffee futures over the past few years. Some years have witnessed les frequent rain that has affected overall coffee production.
Presently, the projected weather pattern suggest that there is going to be too much rain far more than the crop is going to need for proper growth. If this happens, it may equally affect the crop’s productivity and availability in the futures market. Even a projected weather forecast alone can have its toll in the coffee futures market.
Coffee futures traders all want to know what is happening with the Brazilian crop because a little impact might cause a good price swing in the market. The options which give futures owners the right to trade June futures for $1.94 increased by 75%. In line with this development, there was an estimated 2,043 coffee futures contracts traded, the most active future option on ICE yesterday.
It is estimated that world production of coffee will trail demand by 7 million bags by October 2014. This will be the result of changing weather conditions that may not be favorable to coffee production. And the U.S futures data show that it will mark the time coffee futures has witnessed a slump in five years.
The estimated coffee output for Brazil this year range from as low as 46 million bags to as high as 56 million bags. A bag weighs 132 pounds or 60 kilograms. This difference is almost the size of Colombia’s estimated production of Arabica beans.
With this development, all focus will be on Brazil and how weather conditions can affect their own quota of coffee beans in the world’s futures market. It will suffice to say that the weather condition for coffee production in Brazil will go a long way in determining price movements of coffee futures in the world market.