Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Coffee Surges 11 Percent While Inflation Fears Cool
Transcript
- Lucas: Coffee futures have roared back. We're looking at a 5-day gain of over 11 percent on the KC contract, which is the benchmark for arabica coffee. That puts prices near 344 cents a pound. Luna: That's a huge move, especially when you look at the rest of the commodity complex. Crude is down more than 12 percent, natural gas down 5, even gold is slightly off. What's driving coffee? Lucas: A classic supply squeeze. The big story is coming out of Vietnam, the world's largest producer of robusta beans. They've had prolonged dryness during the flowering stage, and then unseasonal rains during harvest. The market is now pricing in a significant drop in their exportable surplus. Luna: Robusta is the workhorse bean for instant coffee and espresso blends. If Vietnamese supply tightens, roasters start scrambling for arabica as a substitute, which pushes both markets higher. Lucas: Exactly. And on top of that, there are renewed concerns about frost in Brazil's arabica-growing regions — the southern Minas Gerais area. The forecast models show a cold front moving in over the next week. That's adding a weather premium on top of an already tight physical market. Luna: So we have a micro supply shock happening against a macro backdrop where headline inflation is actually cooling. CPI for June came in at 332.6, down from 333.98. Core CPI is flat. The 10-year breakeven inflation rate has dropped to 2.21 percent. Lucas: That's the interesting tension. The Fed has been watching the inflation data get more comfortable — PCE is still elevated but trending down. But a coffee rally of this magnitude could be a wildcard. Coffee is a small part of the CPI basket, but it's highly visible. Consumers notice when their morning cup gets more expensive. Luna: Right. And if this supply shock persists, it could feed into the core inflation reading through the 'food away from home' category. Restaurants pass on higher bean costs pretty quickly. Lucas: Precisely. The market is already pricing in a lower terminal rate for the Fed — the odds of a cut at the September meeting have risen. But a sustained coffee rally, combined with any other supply disruptions, could give hawks ammunition to say 'not so fast'. Luna: Let's talk about the oil side for a moment. Crude is plunging — WTI below 81, Brent below 86. That's largely driven by the Iran de-escalation headlines. Iran, Saudi Arabia, and Oman are talking about Hormuz transit security. That reduces the risk premium. Lucas: It's a complete U-turn from three weeks ago when we were worrying about strait closures. Now the market is refocusing on demand concerns — the global manufacturing PMIs have been softening, and China's recovery is patchy. So oil gets a double hit: lower risk premium plus weaker demand expectations. Luna: So coffee is rising on supply, oil falling on demand and geopolitics. That divergence tells you something about where we are in the cycle. Lucas: It does. Commodity markets are sending a mixed signal. On one hand, the industrial side — oil, metals — is saying global growth is cooling. On the other, agricultural commodities like coffee, cocoa, and even sugar are saying supply is constrained. That's not a classic recession pattern, but it's a tricky environment for central banks. Luna: And it's a reminder that even in a disinflationary world, individual commodity spikes can still happen. Investors can't just assume everything moves together. Lucas: Absolutely. Which brings me to something I want to mention. If you find value in walking through the economy with us each day — making sense of moves like coffee rallying while oil crashes — we genuinely appreciate that. Listener support is what keeps this show independent and ad-free. Luna: Yeah, a couple of dollars a month goes a long way. If you've gotten something out of it, you can find us at buy me a coffee dot com slash fexingo. Lucas: No pressure at all. Now, back to the coffee rally — let's look at what the chart is telling us technically. Luna: Please do. We've been talking fundamentals, but the price action has been pretty explosive. Lucas: Coffee broke out above its 50-day moving average on Monday and then gapped higher yesterday on volume. The next resistance level is around 360, which was the high from early June. If we get through that, the next stop is the 2025 highs near 380. Luna: What about the Commitment of Traders report? Are specs piling in? Lucas: The latest COT data shows that managed money has been adding to long positions, but not excessively. The net long is still below the levels we saw in March. So there's room for more buying if the supply story gets worse. Luna: That makes sense. Now, you mentioned the weather risk in Brazil. How reliable are those frost forecasts this far out? Lucas: It's early, and frost prediction at a 7-10 day lead is tricky. But the market is already pricing in some risk premium. If the cold front weakens, we could see a pullback. If it strengthens, we could see another leg up. That's the binary nature of weather-driven rallies. Luna: So the next week is critical. Meanwhile, what about the other softs? Cocoa had been soaring, but it's been rangebound lately. Lucas: Cocoa is still elevated historically but has lost its upward momentum. The focus is back on coffee as the next big mover. And it's not just arabica — robusta futures in London are up nearly 15 percent over the same period. So it's a broad-based coffee rally. Luna: Let's tie it back to the macro picture. If coffee keeps rising, does that change the narrative that inflation is vanquished? Lucas: It adds a wrinkle. The Fed has been emphasizing that they want to see sustained evidence that inflation is returning to 2 percent. A few months of benign data, then a coffee spike, could give the doves pause. But it's unlikely to derail the overall disinflation trend unless it spreads to other food items. Luna: Right. And energy is deflating, which is a big offset. Gasoline prices are falling with crude. Lucas: Exactly. So the net effect on headline CPI might be neutral to slightly negative. But for coffee drinkers, it's a real pinch. And that's the thing about commodities — they affect people's daily lives in a way that financial assets don't. Luna: Certainly. So what's your takeaway for our listeners? What should they watch in the coming days? Lucas: First, the weather models for Brazil — if the frost threat diminishes, expect profit-taking. Second, export data out of Vietnam — we get weekly shipping figures that'll show if the supply squeeze is actually materializing. Third, the Fed's July meeting next week — any shift in language about inflation risks could amplify or dampen the coffee rally's macro impact. Luna: And on the oil side, the Iran talks continue. Any concrete agreement on Hormuz security could push crude even lower, while a breakdown would reverse the drop. Lucas: Right. So it's a fascinating time in commodities. Coffee is the outlier making headlines, but the real story might be how different markets are telling conflicting stories about the global economy.