Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Coffee Futures Are Falling as Roasters Squeeze
Transcript
- Lucas: So coffee is down nearly four percent in five days — arabica futures sitting around 260 cents a pound as of this afternoon. Luna: That's a pretty sharp drop. Is this a Brazilian harvest story, or is something else going on? Lucas: It's mostly Brazil. The 2026-2027 crop is coming in bigger than the market expected. Conab, Brazil's crop agency, revised their estimate up about 3 percent from last month — and this is an on-year in the biennial cycle, so the trees are already producing more. Luna: Right, coffee has that natural two-year rhythm. So the market was already braced for a larger supply, but the revision pushed it over the edge. Lucas: Exactly. And the timing matters. We're heading into the peak harvest months — June, July, August — so the physical flow is about to hit the market just as roasters are deciding their forward coverage. The futures curve is in contango, which means the market is signaling ample supply for months ahead. Luna: Contango in coffee — that tells you storage is getting filled. There's no urgency to buy spot. Lucas: None. So the spec funds have been piling onto short positions. The CFTC data from last week showed managed money net short arabica by the most since early 2024. That's a big shift from just two months ago, when the market was still net long. Luna: And the dollar hasn't helped. It's been grinding higher — the DXY is up about 2 percent in May — which puts pressure on all dollar-denominated commodities, but softs especially. Lucas: Right, because coffee is traded globally in dollars, but a lot of the marginal buyer is in Europe or Japan. When the dollar strengthens, their buying power shrinks. So you get this double hit: more supply, and demand that's effectively curtailed by FX. Luna: So what does this mean for the price of a bag of beans at the grocery store? Or my morning latte? Lucas: Short answer: not much in the immediate term. The futures price is for green, unroasted beans. Roasters buy those beans, they roast them, they package them, they ship them — that whole chain adds cost and margin. A 3.7 percent drop in futures translates to maybe 30 cents off a 12-ounce bag at retail, and that's if the roaster passes it through. Luna: Which they often don't, especially if they've hedged forward. A lot of the big guys — Nestlé, J.M. Smucker with Folgers, Starbucks — they lock in prices months ahead. Lucas: Right. So the retail price is sticky. But here's the interesting part: the roasters are actually in a stronger position right now than the growers. Because the futures drop squeezes the farmer's margin, while the roaster can still sell at the higher retail price. Luna: That margin expansion is basically a transfer from the producer to the processor. And the big roasters have even more leverage because they can negotiate better terms with suppliers when the market is weak. Lucas: Yeah. And we're seeing consolidation accelerate. There was a report last week that a couple of mid-tier European roasters are looking to sell — they can't compete on scale when the big guys are able to buy in bulk at these lower prices. Luna: So the smaller specialty roasters — the ones that source single-origin, fair trade — they're caught in between. They can't hedge as effectively, and their customers are more price-sensitive. Lucas: Exactly. The specialty segment grew like crazy during the pandemic, but now with inflation still above target — core PCE just came in at 129.6 in April, up from 129.32 — consumers are trading down. They're not willing to pay $22 for a bag of Ethiopian Yirgacheffe when Folgers is still $8. Luna: Speaking of trading down — we should probably mention the connection to the broader economy. Because coffee is one of those things that people notice. It's a daily purchase. If roasters start cutting prices, it could show up in CPI. Lucas: It could. But the CPI for food at home has been sticky. The April CPI print was 332.4, up from 330.29. Coffee is a small component, but it's a visible one. If we see retail coffee prices come down, it might give consumers a tiny bit of relief. Luna: Tiny is the operative word. A thirty-cent drop on a $10 bag is 3 percent savings. That's not going to move the needle on household budgets. Lucas: No, but sentiment matters. People feel like they're getting a win when coffee gets cheaper, even if it's marginal. And that's actually a good segue to something else — if you get value out of these episodes, honestly, a couple of dollars a month is what keeps them going. Luna: Yeah, we don't run ads, we don't have a sponsor breathing down our necks. It's just listener support. If you've gotten something out of what we do, you can help at buy me a coffee dot com slash fexingo. Lucas: And it genuinely makes a difference. Even a small contribution helps us keep the lights on and the research flowing. So thanks to anyone who's already chipped in. Luna: Alright, back to coffee. So Lucas, you mentioned the futures curve in contango. How long do you think this weakness lasts? Lucas: That depends on how the Brazilian harvest actually goes. If the weather cooperates and the crop comes in as expected, we could see arabica drift lower toward 240. But there's always the risk of a frost in July or August — that's what spiked prices in 2021. Luna: The frost risk is real, especially in the Minas Gerais region. But the forecasts right now look pretty benign. Lucas: They do. So the market is pricing in a normal harvest. But that also means any weather hiccup could cause a sharp reversal. The spec shorts are crowded — if a frost warning comes out, those shorts will cover fast. Luna: So the setup is: low prices now, but with tail risk of a spike. That's interesting for commodity traders, but for the average person, it's probably just 'coffee is on sale.' Lucas: Right. And depending on your roaster, you might not even see the sale. But if you buy whole bean from a local shop that buys spot, you could catch a break. Luna: I'll be watching my local roaster's price board. Alright, good episode. Lucas: Thanks, Luna. That's it for today's Commodities Economy. We'll be back tomorrow with another angle.