Arabica Coffee Prices Crash Most In Decade As Hedge Funds Caught By Change In Weather

Tyler Durden's Photo
by Tyler Durden
Monday, Sep 14, 2020 - 03:25 PM

Arabica coffee rallied over the summer as a weaker dollar and dryer conditions in South America outweighed the abundance in supply and weak demand, caused by the virus pandemic, which resulted in prices, slumping to a near 15-year low earlier in the year. Now prices are tumbling from eight-month highs, as ICE December arabica coffee KCc2 contracts plunged 8% Monday, to a low of $1.219 per pound, the most significant daily drop in ten years, following a change in the weather forecast for Brazil. 

One of the main drivers behind the slide, as described by Reuters who spoke with multiple dealers, is that "forecast for rains over parched coffee areas in the world's largest producer Brazil ignited sell stops among financial investors that had built a large long position in arabica coffee futures in New York recently."

 "Once the news on Brazil rains came in and funds started selling, sell stops were hit and the market went down," one broker said.

A stronger dollar was another influence on arabica's downdraft in price. The dollar firmed in September, as shown in the chart below (the dollar is inverted). 

Additionally, as Bloomberg reports, in the week ended Sept. 8, hedge funds boosted net-bullish bets on arabica to a four-year high as dry conditions eroded crop prospects.

The funds’ “very large net long position caught some people by surprise,” said Hernando de la Roche, senior vice president at StoneX Group in Miami.

And likely exaggerated the move lower on the rains.

We pointed out one of the unintended consequences of the virus-induced recession, lockdowns, and people working from home is a massive demand shift from expensive coffee beans, commonly found at Starbucks, and called arabica, to cheap beans, found in instant coffee, called robusta.

To sum up, arabica's largest daily drop in a decade was the result of commodity index funds getting too long into a move where an abrupt shift in weather forecasts for Brazil resulted in a deleveraging.