Stand off in the Brazilian coffee market – a foretaste for other food based commodities?

Brazilian coffee producers have a record crop on their hands this year of somewhere between 58 and 65 million bags. So with supply soaring higher than demand, one would expect prices to drop.

Not necessarily so, according to Cooxupé, the Brazilian producer which handles almost 14 per cent of Brazil’s coffee output, whose stated position is that if the price is not attractive to producers, the crop stays in the bags.

This stance is likely to reduce global price erosion and could be bad news for the hedge funds who have bet on a fall in coffee prices, especially arabica.

But in favour of producers, they have storage capacity after poor crops last year and domestic interest rates have fallen, making the costs of holding inventory lower. Buying countries also need to re-stock inventories which have depleted in the last 12 months. Add to these issues the fact that the Brazilian real has depreciated 14% against the US dollar this year, so buyers can tolerate at least stable prices.

So classic economics are at play in a global food commodity market. Expect further economics at play later this year following the great European Summer drought, for example what will barley cost for beer next spring and wheat for bread?