In the first article, the author discussed analysis and predictions, providing an example related to the rising oil prices. Today, we present a new article in which the author wishes to discuss the impact of oil prices on coffee prices.
Let’s continue exploring the coffee market through the political connections in Africa and the Middle East today and their impact on coffee prices. From the blossoming of coffee flowers in Colombia, which is expected to be good, to the tight supply due to recent weather fluctuations in producing countries, and the unpredictable harvest situation in Vietnam, where production fluctuates, all of this is related to supply, and its impact is undeniable.
However, it’s important to note that the entire quantity from this supply is just a small portion of the total global coffee trade, much of which is controlled by financial sources, investors, and traders holding contracts. To put it simply, only a fraction is physical goods, and the rest are virtual goods.
Let me explain in simple terms how futures contracts work and how the scent of oil mixes with the aroma of coffee. For example: Farmer A sends 10 tons of coffee to the trading floor (this is physical coffee). A certificate of shipment is issued to Farmer A, allowing them the right to sell whenever they wish. One fine day, Farmer A sells this certificate to Farmer B, with the condition of delivery in May. Farmer B now holds the position. Later, Farmer B sells the certificate to Farmer C, and this continues until it reaches Farmer Z… and Farmer Z can then instruct the exchange to deliver the coffee to whoever they choose in May, based on the ownership of the certificate in their hand.
We can see that, starting from Farmer B onward, it’s just a piece of paper, which is why it is often referred to as paper goods. The process from Farmer B to Farmer Z involves numerous opinions and speculations from many people before each market change, leading to fluctuations in the market. These ups and downs are largely decided by the dominance of opinions, with virtual goods (paper contracts) outweighing actual goods.
For instance, if the coffee flowers in Colombia are blooming well, promising a bountiful harvest, or if there’s a shortage of oil in Vietnam, causing coffee trees to wither, these stories are only short-term factors. The real impact lies in the paper goods market, where the fluctuations of real-world events are merely one chapter of a much longer and more complex journey of coffee’s fate.
Currently, following the unrest in Tunisia, Egypt, and Libya, oil prices surged to $111 per barrel and may continue to rise. Traders, from Farmer B to Farmer Z, understand that the stocks of companies producing war-related goods such as weapons and cotton will likely increase in price. Oil exports could be halted for an indefinite period if Libya enters civil war or if Egypt remains unstable… So, why not sell the coffee futures certificates, which are at a high price, to buy oil instead?
Let’s not forget, in these countries, no one is thinking about enjoying a cup of coffee when they are in dire need of cotton and medicine more than coffee.
One day, when the situation stabilizes, oil prices will gradually decline, and traders will sell the oil and buy coffee futures contracts again.
Only time will tell how long this period will last, but it seems that coffee prices will still be under pressure from liquidations being sold by Farmer B to Farmer Z. Gaddafi, who has no connection with Vietnamese coffee, made a statement to fight until the last drop of blood, which caused a worldwide crisis, leading to a rise in oil prices and a drop in coffee prices. It’s unfortunate for farmers like us, as everything else is rising in price, but coffee prices are falling.