Coffee Futures Look Fundamentally Mispriced

There are a lot of bullish factors for Arabica coffee futures (read below), while Robusta’s short-term outlook also remains strong, albeit to a lesser extent. Most of the previous week, March 13-17, coffee futures demonstrated a self-reinforcing upward momentum, which is likely to continue as soon as the current global banking crisis which caused massive flight to safe havens like gold and Bitcoin, comes to an end. 

Meanwhile, as of Monday, March 20, May Arabica coffee (KCK23) closed up $1.25 (1.15%), and May Robusta Coffee Futures closed up $0.45 (0.39%) reverting Friday’s losses as US Dollar Index surged to 103.4 keeping individual commodities stories under pressure.

However, concern that the lingering U.S. and European bank crisis has been heavily impacting the outlook for the global economy, with greatly increasing risk of it plunging into recession, won’t let coffee price rally to gain momentum.  Also, a rebound in ICE (NYSE:ICE) inventories is weighing on Robusta prices after ICE Robusta inventories rose to a 3-¼ month high at 7,596 lots.

However, on top of the external news impact, a reported increase in U.S. coffee inventories may be another growth limiting factor for coffee prices. The Green Coffee Association reported Wednesday last week that U.S. Feb green coffee inventories rose +5.9% YoY to 6.105 mln bags.

Another bearish factor for coffee was last Friday's action by Safras & Mercado to raise its Brazil 2022/23 coffee production estimate to 58.9 mln bags from a previous estimate of 57.3 mln bags.
The Honduran Coffee Institute reported that Honduran coffee exports rose 32% YoY to 863,901 bags in February.

A positive factor for Arabica prices was last Friday's forecast by the National Federation of Coffee Growers that coffee production in Colombia, the world's second-largest producer of Arabica coffee, will drop 4.8% YoY to 5 million bags in the first half of 2023 as heavy rain hurts yields. 

Also, last Thursday's Cecafe report presented a positive outlook for coffee prices as it showed that Brazil's green coffee exports fell a whopping 35.8% YoY to 2.11 million bags in February.

Growing flooding problems in Brazil's coffee fields are indeed very bullish on coffee prices. Too wet conditions may not allow some farmers to apply fertilizers and pesticides. Somar Meteorologia recently reported that the Brazilian state of Minas Gerais suffered 63 mm of rainfall in the week to March 12, 157% of the historical average. Minas Gerais accounts for about 30% of Brazil's Arabica coffee production.Summary of Outlook:

All in all, we see quite a complicated composition of mutually balancing factors acting on coffee prices of both main blends. However, if we look more carefully, it’s worth to pay attention to the fact that the majority of the adverse factors are backward looking (inventories buildup, etc.), while most forward-looking factors, conversely, point to growing price supporting conditions going forward.

Bearing in mind high likelihood of elevated volatility for weeks to come due to overall situation on global financial factors, we don’t recommend to open and accumulate coffee futures positions for 2023 summer months contracts. However, an arbitrage trade between May US Coffee C Futures at $177.25 and December Arabica (KCZ23 (Dec '23)) at $172.40 perfectly makes sense because of apparent mispricing given all above-discussed arguments.