Coffee Analysis & Forecast

(Haris Mohammad and Ujan Shrestha)

With 2.5 billion cups of coffee consumed every day and coffee sales exceeding $70 billion each year, it is one of the most dependable and widely traded commodities in the world. Such high levels of demand bring high levels of volatility and production, with coffee being the second most traded soft commodity (monetary volume) in the world. The coffee market was seen as one of the fastest growing and promising soft commodities at 5.8% year on year all until it was faced with the pandemic, placing a severe halt and bringing huge uncertainty. From high street coffee shops such as Costa announcing cuts of 1650 jobs to newly listed parent company JDE Peet, whose brands include Kenco and Douwe Ergbets, have reported declining first-half sales since its listing in May of 1.1%. 

In this report, we look to delve deeper into the implications Covid-19, “The Coffee Paradox” and its formation of inequality as well as what holds for the future of this ever-growing market.  

Covid implications – impact on supply chains and consumer demand 

Given the complex nature of the supply chain of coffee, from growing the beans to harvesting, hulling, drying, packing, bulking, blending and then finally roasting, Covid has shown huge ramifications and weaknesses in the process of the coffee trade. Large coffee exporters such as China have seen coffee sales growth slump from over 40% to just 1.6%. Social distancing measures are also seen to have a negative correlation with the amount of coffee volume being picked and processed. 

The pandemic also created an unprecedented demand shock with net imports from coffee-buying countries down 6%. Lockdown had resulted in almost all cafes and restaurants across the globe closing over a ~3 month period. This was further worsened by the rise in the “work from home” culture, as a large portion of the revenue generated is driven from daily commuters to and fro. 

“Big 4 Coffee Roaster” 

One major issue faced is the divide between sellers and buyers in the market. With few buyers and millions of producers, the coffee market has a monopsony structure. The majority of market power is held by coffee roasting companies, known as the “Big 4 Coffee Roaster” (i.e. Sara Lee, Kraft, Proctor & Gamble, and Nestlé). They account for approximately 50% of global demand, as a result, hold huge bargaining power. The exploitation of this power on small-scale producers means they will reap super-normal profits and have a large influence on pricing.  

Opposing this, producers are faced with downward pressure on wages and suffer poverty. With over 25 million families reliant on the production and sale of coffee, their livelihood is at threat. Further, due to the lack of financial resources, they cannot diversify out, creating a poverty trap. Despite the coffee industry reaping in huge revenues of over $70 billion, only $5 billion is captured by coffee-producing nations, creating what is now known as “The Coffee Paradox”. The lack of regulation and price controls since that is still not in place since 1989 (buffer-stock system run by the International Coffee Agreement) has also contributed towards coffee volatility over the last 10 years. 

Weather / seasonal demand? 

Before we can sip the beverage to relieve fatigue and increase mental alertness, the coffee beans need to be farmed. To nurture the plant and assure a healthy growth cycle, the conditions need to be specific. It is essential that the plants are grown at high altitudes, and preferably in moist, tropical climates, with soils and temperature at 21 degrees celsius. Due to the sensitivity of the coffee beans, climate change poses a significant threat, especially in the tropic regions where the plants thrive. This problem is exacerbated as the production is concentrated in a few countries. The risk of global warming could see a coffee drought, and thus lead to a decrease in supply, which will ultimately lead to a rise in prices. 

There is a great interest in the environment in the status quo, therefore the collective action of governments throughout the world to prevent the deterioration of the climate will be beneficial. By 2080, it is claimed by Kew Royal Botanic Gardens researchers that the consequences of climate change could lead to the disappearance of between 65% and 90% of the locations climatically suitable for wild Indigenous Arabica Coffee. Therefore, collective responsibility must be taken to decrease the effects of climate change, as the coffee industry will be one that falls victim. 

Along with the caffeine stimulant, the comfort and warmth provided by coffee is often heavily sought by individuals. Due to this, during winter times in the major consuming countries, the demand for coffee seems to be greater. In terms of per capita consumption, the top 10 countries all fall in the Northern Hemisphere, therefore they experience winter at similar times.  

As shown in the graph above, the price of coffee seems to decrease till about October and then begin to rise after. This approximately coincides with when the summer season ends in the Northern Hemisphere coffee-loving countries. According to the law of demand, prices increase simultaneously with demand. 

The second highest coffee producing country is Vietnam. Typhoon Molave hit the country and has flooded low-lying areas in a key coffee-growing region and ripped some coffee cherries off the trees. Additionally, the central highlands (Vietnam’s main coffee belt) is expected to face continuous heavy rain, which is likely to affect the harvest. This will affect supply negatively hence increasing the price of coffee. However, it may not affect the coffee traded on the ICE as 95% of the coffee produced by Vietnam is Robusta, whereas arabica coffee is traded on the ICE. Extreme weather increases with global warming and if other countries are affected by similar situations; harvest will be affected and thus create uncertainty in the price of coffee. 


Combined with climate change, political instability also conspires to affect coffee prices. It’s been mentioned that the top 5 countries produced 65% of the world’s coffee, the dependence on these dominant coffee producers isn’t helped by the fact that these countries have a history of political instability. Crises such as leadership vacuum and corruption scandals in these countries tend to unnerve the markets and create concerns about supply disruptions. Political instability may also lead to the currency depreciating; coffee is priced on the US dollar, and if the exporters’ currency becomes weaker compared to the US dollar, the prices of coffee will depress. 

 Furthermore, government policies may also affect the markets, as if policies either encourage or discourage the production and exporting of coffee, then the prices will ultimately change according to the law of supply and demand.  

In 2018 the political uncertainty in Brazil drove down coffee prices after it was dragged down by the weakness of the Brazilian real. During that period, the price of Arabica coffee fell by more than 20%. The correlation between the Brazilian real and coffee prices are used by hedge funds to bet against coffee when the currency weakens. This shows us that periods of uncertainty in the price of coffee is imminent when there is an election in the major coffee-producing countries. 

(Source: Financial times/ Thomson Reuters Datastream) 


Short Term 

As many countries prepare for a second lockdown (including France, Germany and now England), we expect out-of-home consumption to decrease significantly, following suit from previous trends in March / April. Panic buying and stockpiling of groceries including coffee are expected to be subdued this time round given consumers have faced this issue prior. 

With the US election between President Trump and Joe Biden around the corner, the dollar has experienced depreciation given the uncertainty of the outcome, resulting in the market acting bullish. The current sell-off is expected to turn around on election day and coffee expected to shortly rise. 

All being said, coffee is attracting high levels of investment as investors look to hedge against a rather frail and overvalued equities and bond market. This is especially troublesome going into the winter months where Christmas bonuses are typically injected into the stock market, further driving up an overvalued market. The traditional 60/40 portfolio is now at risk of becoming obsolete, with forwarding P/E ratios for S&P 500 companies averaging 21.7x, against a 15.4x over the past 20 years.  

This can be supported with the graph below where we coffee currently being traded in an oversold/undervalued condition at ~$104, with an overall upwards trend despite the high levels of volatility. The 14 periods RSI is sitting approximately at 50% and the stochastic oscillator is displaying a reading under 20, further supporting the oversold commodity. We expect coffee to gain traction for November / December 2020 and progressively build momentum.  

(Coffee graph with moving average, RSI and stochastics)

Long term  

Coffee is a growing market, therefore as the population continues to grow, the consumption will grow simultaneously. This will mean that the demand for coffee will always exist, as it is regarded as a staple in many households throughout the world. This demand can be further increased by emerging economies, for example, the coffee consumption in China has increased as more people have become wealthier. This is supported by the correlation between GDP growth and coffee consumption. It is believed that “one percentage point drop in GDP growth is associated with a reduction in the growth of global demand for coffee of 0.95 percentage points or 1.6 million Jute bags.” Therefore, if GDP increases then the amount of coffee consumption will increase. 

However, if the implication of the recession caused by the pandemic is felt in the long term, then coffee prices may decrease in correspondence to the graph shown below. Furthermore, if any other events in the future cause a decrease in GDP, then coffee demand will fall too.  

The main long-term concern for coffee is the effect of climate change. There is concern about the land used to grow these coffee beans and is even stated that 60% of coffee beans may become extinct as researchers at Kew Royal Botanic Gardens in the UK warn that climate change, deforestation, droughts and plant diseases are putting the future of coffee at risk. This may see an increase in the price of coffee due to the decrease in supply. This may change the coffee markets completely.  

Although the risk of climate change and political instability exists, the demand for coffee in the long term will always exist as many people seek the caffeine to start their days and to continue their days. 

In terms of investing in coffee in the long term, it is very difficult to determine whether the market is bullish or bearish due to massive volatility in the market. Therefore, investment in this soft commodity may be more appropriate in the short term to gain healthy returns. 

Industry jargons 

“The Coffee Paradox” – The paradoxical coexistence of a ‘coffee boom’ in consuming countries and a ‘coffee crisis’ in producing countries 

Stochastic Oscillator – a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time 

Relative Strength Indicator (RSI) – a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. 

ICE: Intercontinental Exchange (coffee is traded as a commodity) 

Arabica – Arabica beans produce a higher quality, sweeter and smoother tasting coffee in comparison to Robusta beans. 

Jute bags – 60kg of coffee beans in bags. 

References (n.d.). Subscribe to read | Financial Times. [online] Available at: 

Daviron, B., Ponte, S. and Books, Z. (n.d.). The Coffee Paradox: Global Markets, Commodity Trade and the Elusive Promise of Development. [online] Available at: [Accessed 31 Oct. 2020]. 


Melanie (2019). The Remarkable Supply Chain of the Coffee Bean. [online] Unleashed Software. Available at: [Accessed 31 Oct. 2020]. (n.d.). Subscribe to read | Financial Times. [online] Available at: [Accessed 31 Oct. 2020]. 

‌Butler, S. (2020). The global coffee market has had a rollercoaster year amid Covid crisis. The Guardian. [online] 4 Sep. Available at: [Accessed 31 Oct. 2020]. (n.d.). Coffee Production. [online] Available at: [Accessed 31 Oct. 2020]. 

‌Pines, L. (2019). Wake Up And Smell The Coffee: Read Our Ultimate Trading… [online] Available at: (n.d.). Rainfall, strong winds threaten Vietnam coffee harvest. [online] Available at: [Accessed 31 Oct. 2020]. (n.d.). Subscribe to read | Financial Times. [online] Available at: 

CNN, L.K. (n.d.). The world’s most popular coffee species are going extinct. [online] CNN. Available at: [Accessed 31 Oct. 2020]. 

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