Coffee price in overbought territory amid Brazil’s weather woes

By: Faith Maina
Faith Maina
Faith strives to break down complex developments so investors can make better informed decisions. When Faith is not immersed… read more.
on Jul 27, 2021
  • Coffee price hit an intraday high of 215.05, which is its highest level since October 2014.
  • The surge is a reaction to extremely low temperatures in Brazil that have damaged coffee trees.
  • Chances of the return of La Nina are rather high, which has further boosted prices.

Coffee price has surged to its highest level in close to seven years as a reaction to the extremely low temperatures recorded in Brazil. The South American country is the leading producer of coffee in the world. It exports about 16% of the beverage consumed globally, with Arabica accounting for about 70% of the shipments. As such, factors impacting its production tend to impact prices at a global level.

coffee price

Brazil’s weather woes

Last week, temperatures in major coffee-growing areas within the country dropped below 32 degrees Fahrenheit, a condition that lasted for hours. The southern part of Minas Gerais experienced the coldest period since 1994.

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According to meteorologists, a similar situation is expected this week. The frost is likely to scorch branches and leaves, thus lessening the production outlook for the coming year. This is especially disheartening as the crop is currently on its biennial cycle and farmers expected a bumper harvest in the next season.

Notably, the low temperatures are the second misfortune to hit Brazil’s coffee farmers after the prolonged drought earlier in the year. Besides, the US Climate Prediction Center has indicated the possibility for the return of La Nina in the coming months. The weather pattern tends to delay rainfall in the area.  

Coffee price has further been boosted by the growing demand. As economies reopen, more coffee lovers are frequenting hotels, coffee shops, and other establishments to enjoy the beverage. This trend is an improvement from last year when the lockdown measures enacted in different parts of the world discouraged consumers from frequenting eateries.

Coffee price technical outlook

Coffee price is trading at its highest level since October 2014. Coffee C futures contract, which is the benchmark for global Arabica coffee, hit an intraday high of 215.05 before pulling back. At the time of writing, it was up by 9.95% at 207.80. Since the beginning of July, it has surged by about 34.60%. On a broader context, it has risen by about 65.5% since the start of the current year.

On a daily chart, coffee price is above the 25 and 50-day exponential moving averages. With an RSI of 78, it is in the overbought territory. In the near term, I expect a corrective pullback even as the bullish outlook remains. The soft commodity is likely to have its price drop to find support along the psychological level of 200. A move below that level will have the bears eyeing the lower support level of 195.45 before the bulls gather enough momentum to push it back up.

coffee price
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