Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Coffee Futures Are Roaring While Inflation Cools
Transcript
- Lucas: Coffee futures are up more than three percent in the last five days, and I think that tells us something interesting about where inflation really lives in this economy. Luna: Three percent in a week, that's a big move for a soft commodity. Is this just weather or is there something else going on? Lucas: Both, honestly. The arabica contract, which is the benchmark for higher-quality beans, settled at 253.80 today. That's about a four percent gain over the week. And the trigger is pretty straightforward: Brazil's main coffee regions have been drier than normal during the critical flowering period. The market is pricing in a potential crop miss for the next harvest. Luna: So it's a supply shock. But the timing is odd because overall inflation is actually cooling. The ten-year breakeven rate dropped to 2.29 yesterday, down from 2.34 a week ago. Lucas: Right, that's the disconnect. The CPI is still ticking up—May's reading was 334.0 versus 332.41 the month before—but the market's inflation expectations are softening. Core CPI ex food and energy is also creeping higher, up to 336.1. But coffee is a volatile component within food at home, and it's showing up in a way that broader indices don't capture. Luna: So coffee is telling us something the macro numbers miss? Or is it just its own micro story? Lucas: I'd say it's a bit of both. Coffee is a small weight in the CPI basket—it's not going to move the needle on the headline number. But the fact that coffee is rallying while the breakeven is falling suggests that inflation is becoming more concentrated in specific supply-constrained pockets. Durable goods inflation is fading, but food and energy remain sticky. Luna: And coffee is definitely supply constrained. The market's been tight for a while. But I also wonder if there's a demand angle—like, are people still willing to pay up for their morning cup even as the economy slows? Lucas: That's the thing about coffee—it's one of those small indulgences that people don't easily give up. Even in a recession, coffee demand is relatively inelastic. So when supply gets squeezed, prices can move a lot without destroying demand. That's exactly the setup we have now. Luna: And it's not just Brazil. Other producers like Colombia and Vietnam have had their own issues. Vietnam had drought concerns earlier this year for robusta, and that spilled over into arabica as roasters substituted. Lucas: Exactly. The robusta market has been tight for over a year, and that's pushed up the whole complex. Now with Brazil's weather worry, arabica is catching a bid. And there's another factor I think is worth mentioning: the SpaceX IPO today is sucking up a massive amount of speculative capital. Twenty-five percent pop on the first day, Elon Musk becomes the world's first trillionaire. That's a lot of attention and liquidity being pulled out of other markets. Luna: So you're saying coffee might be getting less speculative interest because everyone's piling into SpaceX? That would actually make the move more fundamentally driven, right? Lucas: That's how I read it. If coffee were rallying on speculative froth, you'd see volume spike and open interest jump. But what I'm hearing from traders is that the action is all in equities today. Commodities are a bit of an afterthought. So the coffee move is probably more about real supply concerns than momentum chasing. Luna: Which makes it more durable, at least in the near term. Unless the weather improves in Brazil. Lucas: Right. And that's the big unknown. Forecasts show some rain in the next ten days, but not enough to break the dryness. The market will be watching every weather model update. If the dryness persists, we could see coffee push to 270 or higher. Luna: That's a pretty significant rally from here. But you also have to wonder about the macro headwinds—if the economy really slows, will coffee demand finally crack? Lucas: Historically, coffee demand has been remarkably resilient. In 2008, global coffee consumption barely dipped. And in 2020, during the pandemic, it actually increased because people were brewing at home more. So I think the risk is more on the supply side. Luna: Speaking of which, the other soft commodities are mixed today. Cotton jumped four percent, cocoa up three. But corn and soybeans are down. So it's not a broad ag rally—it's very selective. Lucas: That selectivity is a hallmark of a market that's driven by idiosyncratic supply stories rather than a big macro wave. Cotton had its own weather issues in Texas, cocoa is still recovering from the West African disease problems. Corn and soybeans are looking at favorable planting conditions in the US. So you have to look at each one individually. Luna: It's almost like the macro narrative of 'inflation is cooling' is masking a lot of micro pain in specific commodities. And coffee might be the canary in the coal mine. Lucas: And that gets to the core of what we do on this show—finding the stories behind the numbers. I think a lot of listeners appreciate that we take the time to dig into these connections. It's something that, honestly, a lot of financial media doesn't do because they're chasing the big headlines. Luna: Yeah, and it's one of the reasons people tell us they keep listening. It's a niche, but it matters. And we're able to keep this show ad-free because of listener support. If you've gotten value out of these deep dives—whether it's understanding coffee, copper, or crude—a couple of dollars a month genuinely makes a difference. It's like buying us a coffee, appropriately enough. Lucas: Ha, exactly. You can do that at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Even a small contribution helps us keep the lights on and the analysis independent. Luna: Alright, back to the grind. What are you watching for coffee in the next few weeks? Lucas: The main thing is the weather in Brazil's Minas Gerais region. If the rains come, you could see a quick pullback. But if they don't, this rally has legs. Also, keep an eye on the Brazilian real—if it weakens, that could encourage farmers to sell more aggressively, which would cap prices. So it's a multi-variable equation. Luna: And on the macro side, the Fed meeting next week—if they signal a pause, that might weaken the dollar and support commodity prices broadly. Lucas: Exactly. Coffee has a lot of moving parts, but the supply-demand balance is tightening. And that's the kind of story we'll keep tracking for you. Luna: Next time on The Commodities Economy, we're looking at a surprising rally in orange juice futures—what's driving it and whether it's sustainable. Lucas: That sounds like a juicy one. See you then.