What’s your cup of coffee worth?

By Oren Laurent
President, Banc De Binary

We all know that oil is central to the world’s economy, but who knows how the markets would respond to a day of businessmen taking a break from their coffee habit? While oil and the other top traded commodities have made headlines for their falling prices in the past year, thanks to slowing growth in Europe and the emerging markets, in contrast, coffee has experienced a dramatic rise.
If you’re anything like me, coffee is an integral and enjoyable part of the day. It’s a commodity that so many of us take for granted, and as prices have climbed, we have opted to pay the difference rather than go without. But how long will this continue for? Let’s take a look back at coffee’s story this year, and consider the price expectations for 2015.
The key factor driving up the value of the coffee bean has been the dry weather in Brazil, producer of one third of the entire world’s coffee and the largest exporter of the precious beans. The historic drought at the start of the year forced 140 Brazilian cities to ration water and hindered the pollination of coffee trees. This led to the smallest harvest in three years. At the same time, coffee farmers in Central America were still struggling to combat the fungus that has been affecting their produce and livelihoods for two years now. According to the London based International Coffee Organisation, around 70% of the coffee crop in Guatemala, El Salvador and Costa Rica has been infected.
Given the combined impacts of the fungus and draught, the reduced supply pumped up prices all the way to a 2.5 year high in October. In 2014 as a whole, coffee gained a staggering 58%. If you love a caffeine boost, you almost certainly will have noticed. The increase was significant enough to pull at the purse strings of coffee shops and end consumers worldwide. Half-way through the year, faced with higher costs, Starbucks and Folgers increased their prices. Investors interpreted the sequence of events negatively for the beloved brands; by June 20, Starbucks’ stock price had lost 1.5% from the start of 2014.
The supply of beans could fall further. Analysts say that the delayed flowering period caused by this year’s draught could impact on next season’s crop, and weather experts predict that Brazil’s dry weather will continue into the New Year. In Central America, there remain no clear cure for the fungus.
So next time you crave a cup of instant, or indulge in a cappuccino, be sure to appreciate it that bit extra. If conditions do not improve, prices may potentially rise another 30%. “Caffeine high” could soon take on a whole new meaning.