Current events leave coffee, oil, commodity prices in limbo

2022 was supposed to be a year when things got back to normal following COVID setbacks. But as everyone now knows, that has not been the case.

For coffee and other commodities, the outlook is less predictable than at any time many people can remember.

"Volatility we see today we have not seen in at least 30 - 40 years," said Albert Scalla, senior vice president of trading at StoneX Group, a New York City based global financial services network that connects companies, traders and investors to the global markets ecosystem. Scalla, who is based in Miami, offered his insights during a presentation at the National Coffee Association's virtual convention, "The Year of Coffee's Roller Coaster. When Can We Expect to Get Off the Ride?"

Scalla gave insights into the factors affecting coffee prices and coffee production, as well as factors affecting oil and other commodities.

Pandemic recovery boosted prices

By way of background, he noted he prepared a presentation with the same title last year, not thinking the question could ever be harder to answer. At that time, coffee observers were mulling the various factors that had forced coffee prices to high levels, factors such as the reopening of economies in June and July of 2020 following the coronavirus pandemic.

"Markets were beginning to open up," he said. "Investment funds were beginning to come back to the commodities area."

Also contributing to commodity price increases was the devaluing of the U.S. dollar.

Then came El Nina, the periodic cooling of ocean surface temperatures in the central and east-central equatorial Pacific, which delayed rainfalls in 2020.

In addition, "inflation began to set in right in the middle of last year, then we were hit with the effect of the Brazil drought," he said.

Come July of 2021, a series of frosts hit Brazil.

"Prices spiked to levels not seen in several years," he said, noting the last frost was in June 1994.

Oil and commodity prices surge

As noted, coffee was not the only commodity impacted by the pandemic.

A lack of available storage impacted the price of oil.

The commodities "super cycle" that normally occurs every 14-18 years is now occurring after nine to 10 years, Scalla said. Super cycles are periods when commodities trade above long term price trends, the last such period ending in 2015.

The current shorter super cycle is caused by: 1) a drop in the perceived value of the U.S. dollar, 2) low interest rates, 3) inflation and 4) business reopenings.

"Reopenings are bringing back all the money that was saved (from the pandemic), and all the moneys that was given in subsidies from government," Scalla said.

The commodity price increases are affecting a wide range of food prices.

"A huge rally in the commodities affects world food prices," Scalla said. "We are almost at the high of 2011 and 2008. Every single food item has gone to the roof."

Russia invades Ukraine

Enter the Russian invasion, the immediate impact being a further spike in oil prices.

It has also driven a spike in wheat, an important food item for most of the impoverished nations. Prices for edible oil, also needed for bread, have also spiked. Food price inflation brings the risk of further political unrest, as occurred in the Arab Spring in the early 2010s.

"This (oil price spike) hits directly to the basic food stuff of many countries," Scalla said.

Coffee prices are especially vulnerable on account of the Russian invasion of Ukraine.

Russia consumes about 4.2 million bags while Ukraine consumes another 1.3 million bags, representing 5.5 million bags now out of the market out of the total 164 bags consumed. Surrounding countries consume another 4.87 million bags that are put into question.

The 'elephant in the room'

As if all that were not bad enough, the "elephant in the room," Scalla said, is fertilizer, which impacts food costs.

"With Russia locking down, (fertilizer) prices are spiking again," he said.

Russia is the largest exporter of nitrogen fertilizers, accounting for 17% of the global supply. China, meanwhile, which accounts for 10% of world fertilizer supply, has shut down fertilizer exports because it wants to keep it for its own consumption.

"Brazil imports 20% of their fertilizer needs from Russia," he said.

Consumption, production questions

Still another challenge is the coffee industry's ability to match production with consumption.

Per capita coffee consumption is not keeping up with population growth, Scalla said.

On the production side, uncertainty also exists due to the weather outlook.

La Nina began in the last quarter of 2019 and did not show the full effect until the second half of 2020.

"We need to keep this item of La Nina in check because we're still not out of the fire," Scalla said.

"Because of all this weather, combined with the fertilizer situation, we need to keep an eye and follow the plant branch growth, because this is what's going to give us the October flowering on Arabica," he said.

Asked how much fertilizer Brazil has in inventory, the amount is under three months, according to one source Scalla is familiar with. While this is based on "numbers going around," it is an issue the Brazil agriculture ministry is "extremely concerned about," he said.

Asked if reduced demand from Russia could depress coffee prices, Scalla said it could.

Russia will have issues trading commodities due to sanctions as well as SWIFT, a global electronic transaction system, blocking Russian banks. Bartering could be an avenue for Russian trade, particularly on fertilizers that traded through China.

"It will turn around a little bit on the prices on the inventories," he said.

The overall picture, however, remains a big question mark.

"I have never seen so many variables, so many uncertainties, so many question marks as the past two years," Scalla said. "Going forward, expect much higher volatility."

Photo courtesy of Albert Scalla.