How speculation affects coffee market prices?

Speculation in the coffee market extends beyond simple buy-low-sell-high trading strategies; it creates liquidity and risk hedging opportunities for market participants while directly impacting the livelihoods of millions of farmers and industry operations.

How coffee market speculation works

Coffee futures contracts are the primary instruments for market speculation, trading on two major exchanges:

• ICE Futures US (New York): Trading Arabica coffee
• LIFFE (London): Specializing in Robusta coffee

Standard contract sizes are set at 37,500 pounds (approximately 17 metric tons) for Arabica and 10 metric tons for Robusta, creating market liquidity and standardization.

Modern coffee speculation takes two main forms:

– Fundamental Speculation: Based on analysis of real market supply-demand factors, weather conditions, expected yields, consumption demands, and macroeconomic factors.

– Technical Speculation: Predominantly conducted through technical analysis and algorithmic trading. Computer systems analyze price patterns and execute trades in milliseconds, creating rapid and significant price movements.

The coffee market is heavily influenced by futures contracts, where speculators bet on future price movements. Their activity can amplify trends; for example, if many traders believe prices will rise, they may buy contracts en masse, pushing prices higher. Conversely, if they expect prices to fall, they may sell off their positions, causing coffee prices to fall.

Factors driving speculation

Firsly, it’s about climate and weather impact. The 2021 Brazilian frost serves as a prime example, driving Arabica prices from 150 to 260 US cents/lb, their highest level in seven years. Climate change continues to force Arabica cultivation to higher elevations with less fertile soil, creating future supply uncertainties and driving speculative activity.

The second reason is currency dynamics with exchange rates, particularly USD fluctuations, profoundly influence coffee speculation. A stronger USD typically pressures coffee prices downward as it becomes more expensive for buyers using other currencies. Conversely, a weaker USD can stimulate exports and drive prices higher.

Inflation impact is next during high inflation periods, investors often turn to commodities like coffee as a value preservation tool, creating significant upward price pressure.

Adittionaly, geopolitical events with recent examples include:

• Yemen conflict disrupting Suez Canal shipping routes, forcing vessels to reroute around Africa, increasing costs and transit times
• Political unrest in Brazil in early 2023 raising concerns about supply chain disruptions
• Regional conflicts in major coffee-producing countries creating ongoing market uncertainty

Coffee prices have surged 73.03% since early 2024, reaching historical highs of 349.58 in December 2024, according to CFD trading tracking market benchmarks. This dramatic increase reflects the cumulative impact of various speculative drivers in the market.

Market impact of speculation

Speculation creates both immediate and lasting effects on coffee prices.

• In the short term, daily price movements can be swift and dramatic, creating market noise that divorces prices from fundamental factors. This volatility often leads to wider trading spreads, increasing transaction costs for all market participants.
• The long-term effects are more profound, establishing price trends that can persist for months. These extended trends significantly influence farmers’ investment decisions and shape roasters’ inventory strategies.

For instance, during sustained price increases, farmers might expand their plantations, while roasters adjust their purchasing patterns to manage costs.

The impact on stakeholders varies significantly across the coffee value chain.

• For producers, price volatility makes long-term production planning and investment challenging. However, it also presents opportunities for higher returns when market timing aligns favorably.
• Coffee farmers must constantly balance between immediate market opportunities and sustainable farming practices.
• Traders and exporters face heightened price risks in this environment, forcing them to strengthen their hedging activities and maintain larger safety margins in their operations.This increased risk management often translates to more conservative trading strategies and stronger emphasis on long-term contracts.

For consumers, the impact of speculation is somewhat cushioned. Roasters typically absorb some of the price volatility to maintain customer loyalty, though significant market movements eventually affect retail prices.

These market dynamics demonstrate how speculation can amplify the effects of fundamental factors, creating both challenges and opportunities for industry participants. Understanding these impacts is crucial for developing effective response strategies at both individual and industry levels.

A recent example illustrates this dynamic: Robusta prices doubled to $4,080 per ton by April 2024, primarily due to prolonged drought in Asia affecting Indonesian and Indian harvests, combined with shipping disruptions caused by the Yemen conflict forcing vessels to reroute around Africa.

Strategies for managing market speculation

• For producers

In today’s modern market environment, success requires a comprehensive approach to managing speculation. Drawing from Brazil’s experience, successful farmers combine spot and forward selling flexibly, adjusting their strategies based on market conditions. Production diversification has become essential, extending beyond simply growing different crops to include developing various coffee varieties and implementing sustainable farming practices. This approach not only minimizes price risks but also creates added value through sustainability and organic certifications.

• For trading companies

Trading companies must develop sophisticated risk management systems. Experience from major firms like EFICO GROUP demonstrates the importance of continuous market monitoring and timely decision-making. This requires significant investment in both technology and skilled personnel for market analysis. Building sustainable relationships with both buyers and sellers has become more critical than ever. Successful traders maintain diverse client portfolios and establish long-term agreements to minimize short-term price volatility impact.

Crop to Cup is an example of a sustainable coffee trader that prioritizes building ethical and responsible farmer-to-farmer relationships, creating a solid foundation to weather the stormy coffee market.

• For the whole industry

The industry has begun exploring comprehensive solutions drawn from experiences in other commodity markets. Financial institutions are developing derivative instruments better suited to small producers’ needs. Governments can support through risk management training programs and improving market access for farmers. An emerging trend is the development of local trading platforms that directly connect buyers and sellers, reducing dependence on international exchanges and creating more transparent pricing mechanisms for domestic markets.

Vertical integration within the value chain represents another emerging solution. Many traders have begun investing in production facilities or establishing strategic partnerships with roasters, enabling better supply control and reducing speculation-related risks. Companies like Crop to Cup exemplify this approach, prioritizing ethical and responsible relationships between farmers and households to create a solid foundation for navigating volatile coffee markets.

In essence, successful navigation of coffee market speculation requires a balanced approach combining traditional risk management with innovative solutions, supported by strong relationships throughout the supply chain. This comprehensive strategy helps create a more resilient and sustainable coffee market for all participants.

In summary, market speculation in coffee trading is an unavoidable reality with both positive and negative aspects. While it provides necessary market liquidity and risk hedging opportunities, it can also create price instability. Success in this market depends on participants’ ability to adapt and manage risks while contributing to a healthy and sustainable market ecosystem.

Images used in the article come from 43 Factory Coffee’s partners and are collected.

Frequently asked questions

1. Why do coffee prices fluctuate so dramatically?

Coffee prices experience significant volatility due to a combination of factors: speculative activity from large investment funds, weather variations in major producing countries like Brazil and Vietnam, and high-frequency algorithmic trading. Notably, with 90% of current trading being computer-driven, market reactions to news or events can create instantaneous chain reactions.

2. When is the right time to buy or sell coffee?

According to Michel Germanès, EFICO GROUP CEO with 40 years of industry experience: when prices reach levels that align with your budget and business strategy, make decisions within the day. The coffee market rarely maintains price levels for extended periods, particularly in today’s volatile environment.

3. Why do Robusta and Arabica prices often follow different trends?

These two coffee types operate in distinct markets with different influencing factors. Arabica (traded in New York) shows higher sensitivity to Brazilian weather patterns and premium coffee demand, while Robusta (traded in London) is primarily influenced by Vietnamese production levels and instant coffee market demand.

4. Is speculation always detrimental to the coffee market?

Not necessarily. While excessive speculation can destabilize prices, it also provides essential market liquidity and risk hedging tools for producers and traders. The key issue lies in implementing appropriate oversight and management mechanisms rather than eliminating speculation entirely.

5. How will climate change affect the coffee market in the future?

Rising temperatures are forcing Arabica cultivation to higher, less fertile elevations. This trend could lead to decreased Arabica production and increased Robusta prices in the long term, as Robusta’s greater climate resilience may enhance its importance in global supply-demand dynamics. This shift could fundamentally alter traditional coffee market patterns.