Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Coffee Futures Are Plunging While Cocoa Soars
Transcript
- Lucas: If you look at soft commodities this week, there's a glaring divergence. Coffee is getting absolutely crushed — arabica futures, that's the K-C contract, down nearly ten percent over the last five days. Cocoa, on the other hand, is still hovering near its all-time highs. Luna: Ten percent in a week feels brutal. What's driving the coffee collapse? Lucas: It's mostly supply-driven. Brazil, the world's largest arabica producer, is wrapping up a monster harvest. The latest estimates from Conab, Brazil's crop agency, are pointing to a crop around fifty-five million bags — that's well above last year's drought-affected number. And the quality is good, too. So the market is suddenly awash in high-grade beans. Luna: Right, so a supply glut. But cocoa is having the opposite problem, isn't it? Lucas: Exactly. Cocoa's story is all about West Africa — specifically Ivory Coast and Ghana, which produce about sixty percent of the world's cocoa. They've had erratic rainfall and persistent black pod disease. The mid-crop harvest there is coming in smaller than expected. And unlike coffee, you can't just ramp up cocoa output quickly — trees take years to mature. Luna: So we've got this classic soft commodity narrative: one region has a bumper crop, another has a shortfall. But is there any demand angle here? Are people suddenly drinking less coffee and eating more chocolate? Lucas: That's the interesting part. Demand for both is actually pretty stable globally — low single-digit growth, maybe one to two percent annually. So this isn't a demand story. It's really about the supply shock hitting each market at different times. Coffee's supply wave came all at once, while cocoa's been a slow drip of bad news. Luna: And yet gold is also near four thousand dollars an ounce. That's another kind of divergence — coffee crashing while gold surges. Makes you wonder if traders are rotating out of risk-on commodities into safe havens. Lucas: Could be part of it. Gold's up about a grand year-over-year, and coffee's down. But I think the coffee move is pretty much its own story. Brazil's harvest is the biggest variable. If you look at the speculator positioning in K-C futures, the net long has been shrinking for weeks. The big money saw this coming. Luna: Speaking of big money, have you noticed how the energy sector is also doing its own thing? Crude up three percent this week, but natural gas barely moved. Lucas: Yeah, oil is getting a geopolitical bid with those U.S. strikes in Iran over the weekend. But that's a different episode. Today I want to stay on the softs because the coffee-cocoa divergence is one of the widest I've seen in years. The spread between them — coffee's drop and cocoa's resilience — it's almost unprecedented. Luna: So for a listener who wants to trade this, what's the play? Short coffee, long cocoa? Lucas: That's the obvious spread trade, but it's already priced in. The real question is whether coffee can bounce. Historically, after a big Brazil harvest, prices often bottom out and then rally once the market digests the supply. But this year, the crop is so large that any recovery might take months. And cocoa? The supply constraints are structural — it could stay elevated for a while. Luna: It reminds me of that old commodity adage: 'the cure for low prices is low prices.' Eventually, cheap coffee discourages planting, and high cocoa encourages it — but that takes years. Lucas: Exactly. And that's why following these markets is so fascinating. You get these real-time signals about global agriculture. If we can make sense of them for you, even just a little bit, that's our goal here. Luna: And if walking through the economy with us has made something click, listeners can support the show at buy me a coffee dot com slash fexingo. It keeps us ad-free and independent. Lucas: Yeah, we really appreciate that. So back to the divergence — I want to pull up a specific number. Coffee's K-C contract closed at 304.70 today. That's down from 337 just a week ago. Cocoa, meanwhile, is still above 4,000. That's a spread of nearly 3,700 points. Luna: That's enormous. And it's not just about the raw numbers. Think about the downstream impact. Coffee roasters are suddenly getting cheaper input costs, which could mean lower retail prices later this year. Chocolate makers, on the other hand, are still squeezing margins. Lucas: Right. Hershey and Mondelez have already warned about cocoa costs. Coffee companies like Starbucks might actually get a tailwind. So this divergence matters beyond just futures traders — it hits your grocery bill. Luna: And the weather forecast for West Africa? Any relief for cocoa? Lucas: The short-term models show more rain in Ivory Coast, which could help the main crop due later this year. But the damage to the mid-crop is already done. So even if weather improves, we're looking at a tight market through at least the end of 2026. Luna: Meanwhile, Brazil's coffee harvest is basically finished. The question now is how much of that coffee gets exported versus stored. Lucas: And that depends on the Brazilian real. If the real weakens further, it incentivizes selling — more coffee floods the global market. If it strengthens, farmers may hold back. So there's a currency layer here too. Luna: It's never just about the crop, is it? There's always a financial cross-current. Lucas: Never. That's why commodities are so much fun. You've got physical supply, weather, geopolitics, currency, and speculative flows all colliding at once. Coffee right now is a perfect example of that. Luna: Let's zoom out a bit. If I'm a long-term investor, does any of this matter? Or is it just noise for traders? Lucas: I think it matters for anyone who owns companies that are big users of these inputs. If you own restaurant stocks, coffee costs affect margins. If you own consumer staples, cocoa costs matter. So it's not just noise — it's a signal about earnings power. Luna: Good point. And this week, with earnings season ramping up — Alphabet and Tesla report — we might see some commentary on input costs. Lucas: Absolutely. So keep an eye on coffee and cocoa spreads. They may be telling us more about the economy than a lot of macro indicators. Luna: Alright. To sum up: coffee down on a Brazilian bounty, cocoa up on West African disease, and the spread between them is historic. Thanks for walking through it. Lucas: Thanks, Luna. And thanks to our listeners. We'll be back tomorrow with another dive into the commodities economy.