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    Is a Bull Brewing in Your Cup of Jo - Part 2

    The price for your morning cup of coffee has encountered a few unexpected supply bottlenecks since I penned “Is a Bull Brewing in Your 2020 Cup of Joe?” in Dec. 2019. The main concern back then was production deficits and the potential for an international price stabilization mechanism to be implemented.

    “If delivery defaults domino and a production deficit grows beyond expectations for any unforeseen reason going forward, contagion could result in additional price spikes in the future.” – TraderStef, 2019

    Despite the lack of serious inflation while brewing your favorite cup of joe at the advertised price, do not lose sight of “shrinkflation” that significantly reduced the size of your 1lb package to 12 ounces or less in recent years. Retail-level pricing has remained relatively muted even with price volatility in the futures market, as pricing for the raw bean is relatively low vs. overall costs involved in delivering a packaged end-user product to your local grocery chain shelf.

    Concerns over a supply shortage have surfaced again with a “perfect storm” of issues that include intermittent supply disruptions and backups at U.S. ports due to the global pandemic, COVID-19 variant infections and deaths at record levels in Brazil, unfavorable weather patterns over South American plantations, the recent surge in wholesale pricing while U.S. supplies have fallen to a six-year low, a global shortage of shipping containers alongside a doubling of shipping costs from South America, and the current Suez Canal blockage by the grounded and wedged “Ever Given” (Evergreen Marine Corp.) golden-class container ship.

    Global coffee production by country…

    Global Coffee Supply Sources Graphic

    Global Coffee Production as of 2020 Visual Capitalist

    Coffee Production Graphic Courtesy of Visual Capitalist

     

    Global Coffee Deficit… “A global coffee deficit of 10.7 million bags is forecast for the 2021/22 season, driven by a sharp drop in production in Brazil, broker Marex Spectron said in a report on Friday. ‘Recent field trips verify the damage done to Brazil’s arabica 2021 crop. Although rainfall, since late November, has been close to normal, losses incurred during the prior period are irretrievable.’” – Commodity3, Mar. 8

     

    American port congestion shows no sign of easing… “Changed buying patterns brought about by the pandemic have brought extreme consumer demand into North America. This combined with Covid outbreaks among dock workers, and a shortage of container equipment have created what many liner executives have described as the perfect storm in recent weeks…  Shippers were told at TPM, the world’s top container conference, held earlier this month that they’ll need to wait through to the second half of the year before any semblance of normality returns to container trade flows.” – Splash247, Mar. 10

     

    The World Is Facing a Coffee Supply Chain ‘Nightmare’… “Coffee supplies in the U.S. are shrinking and wholesale prices are surging… Coffee stockpiles have sunk to a six-year low in the U.S. even with Brazil’s record crop, and a large drop in output after a drought in the South American country is expected to shift the world balance to a deficit in coming months just as demand rebounds… Importer Wolthers Douque in Florida estimates that shipping costs have more than doubled from Latin America and ‘bottlenecks are turning into a container nightmare’… For now, roasters are able to draw on inventories rather than raise prices, but with stockpiles sliding and a smaller Brazilian crop coming, the strains are expected to persist… In February, American green, unroasted bean inventory slid 8.3% from a year earlier to the smallest since 2015.” – Bloomberg, Mar. 23

     

    Blocked Suez Canal Adding to Container Shortages, Supply Chain Snarls, Component Shortages for Manufacturers… “This snarl-up of container ships comes amid a container shortage and a ship shortage as container ships are already waiting to enter backlogged ports, particularly U.S. ports. These port backlogs tie up ships and containers, and the whole flow has been interrupted. The concern is over containers and container ships and supply chains. The Suez Canal serves routes from Asia to Europe and doesn’t directly impact freight from Asia to the US. But supply chains are complex and global, and the ripple effects will drag out for months.” – Wolf Street, May 25

     

    Coffee Market Report… “The Colombian National Coffee Growers Federation reports that the 2019 to 2020 coffee production is 6% down from the previous coffee year, and a slight decrease in production for the first half of 2021 due to the effects of the La Niña weather phenomenon… A proposed tax reform is set to go to congress next month which may see new taxes levied on agricultural inputs such as fertilizers. The negative financial impact that this may have upon coffee farmers to inevitably result in low farm inputs ahead of the new coffee crops, to affect overall potential yield, as well as during harvest, less cyclical harvest rounds reducing the potential quality of harvested coffee.” – SCASA, Mar. 26

     

    Suez Canal blockage could intensify shipping delays, lead to shortages of toilet paper, coffee and other consumer goods in the U.S. “The blockage of the Suez Canal by a skyscraper-sized cargo ship could worsen months long snarls in the global supply chain… About 10% of global trade passes through the canal, or nearly $10 billion of goods daily. There are virtually no alternative routes for shipping goods from Asia to Europe. As a result, imports to the U.S. from Europe could be delayed and the blockage could prevent empty shipping containers from being returned to Asia, compounding a worldwide container shortage sparked by the pandemic and rising consumer demand. Although U.S. imports from Asia generally traverse the Pacific Ocean to California, delays of parts sent from Asia to Europe could push back deliveries of finished products from Europe to the U.S.” USA Today, Mar. 27

    As of this evening, the Ever Given remains hard aground in a wedged position blocking transit through the Suez Canal. Major container lines are rerouting some ships to round the Cape of Good Hope (South Africa), including Lloyd’s List, Maersk, and CMA-CGM, but damage to global just-in-time (JIT) inventory reliance is already apparent with extensive near-term delays a given (pun intended).

    Ikea-to-Caterpillar hit by Suez blockage in growing trade crisis… “The crisis comes as companies were already battling the strain of adapting supply chains to cope with a pandemic-related e-commerce boom, while COVID-19 regulations at ports are slowing the passage of some products. P&F Industries Inc., a U.S. maker of pneumatic hand tools, said the Suez shutdown only exacerbates delays to trade that have caused the firm to add six to eight weeks to expected delivery times. When they arrive in the U.S., ‘shipments are going to sit there for quite a period of time, days, a week, even two weeks before customs and everything else lets you go,’ Chief Executive Officer Richard A. Horowitz told analysts this week.” – Bloomberg, Mar. 26

    Suez Canal to Cape of Good Hope Shipping Detour

    Live Updates on Ever Given… “‘It’s difficult to determine when the container ship saga blocking the strategic Suez Canal will be resolved,’ Suez Canal Authority (SCA) Chairman Osama Rabie said on Saturday.” – Ahram News, Mar. 27

    Salvage teams are alternating between dredging and tugboats to dislodge the massive container ship, as efforts are complicated by rock under the ship’s bow. Dredging has already shifted 27,000 cubic meters of sand to a depth of 19.7 yards. Egypt’s President Abdel Fattah al-Sisi has ordered preparations for the possible removal of some of the ship’s 18,300 containers to help lighten the load starting Monday. Shipping rates for oil product tankers have nearly doubled since the ship became stranded on Mar. 23.

    Global Economy Girds for Latest Supply Jolt in Suez Mess… “‘It is a severe blow to the already constrained supply chains that were just recovering from the Covid pandemic,’ Rahul Kapoor, vice president of maritime and trade at IHS Global Insight in Singapore, told Bloomberg Television on Friday. ‘If it goes into weeks, it could turn into what we could call catastrophic.’” – gCaptain, Mar. 28

    Here is the current price data on ICE coffee futures pricing through May 2023.

    ICE Coffee Futures May 2021-23

     

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    Stay abreast of the Suez Canal situation and the potential emergence of a more virulent pandemic wave on the horizon. Consider the technical analysis on the following coffee charts. To view a larger version of either chart, right-click on it and choose your “view image” option.

    ICE Coffee Futures weekly chart as of Mar. 26, 2021 close…

     

    JO ETN weekly chart as of Mar. 26, 2021 close…

    Excerpt from the Dec. 13, 2019 weekly chart analysis:

    “This week’s price action put in a high of $140.30 and closed today at $129.75, which printed a bearish Plunger Candle (aka Shooting Star)… The parabolic move in price appears to have gotten ahead of itself, and profits were taken this week while approaching the close. There clearly needs to be a period of price consolidation IF the price action is destined to take out the 23.6% Fibonacci and reach the 38.2% level at $172.”

    The focus is on the ICE futures chart with a 2011 high of $308.90 that plunged to a low of $87.60 in May of 2019. The JO chart is nearly identical with the exception of different price points and Fibonacci levels. The ICE futures trendline drawn down from its 2011 high was taken out with conviction during the first week of Nov. 2019 and that price spike was halted dead in its tracks at the 23.6% Fibonacci with a bearish Plunger Candle (aka Shooting Star).

    The positives on the chart are a bullish DMI-ADX but its momentum has leveled off, and the price action has continued to print higher lows since May 2019. The topside lateral resistance is around $140 at the 23.6% Fibonacci level. This week’s price action closed at $128.50. The negatives are a StochRSI that is trending downward and the last two weeks have seen steady sell Volume despite the pivot off the lower trendline of an Ascending Broadening Wedge after the Ever Given news.

    IF all the variables noted in this article play out and a substantial bottleneck in coffee bean supply manifests in the near-term, the chart needs a substantial boost of buy Volume to push the futures price back into the $140 zone. If the price action breaks away from the $140 resistance, odds favor a consolidation somewhere between $140 and the next Fibonacci level at $172. Retail investors can trade JO with bus stops at $40, $45, and $50.

    Officer Reacts – Ever Given Blocking the Suez Canal

     

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