Inflation Brewing: Is Coffee the Next Cocoa?

Cocoa prices have dumped since rocketing to a dramatic peak last month as an El Nino cycle winds down and traders rush out of the illiquid market. For now, depreciating fiat currencies are still keeping the cocoa price still far above its 2023 levels. Coffee has had a similar rise and subsequent correction — but now, inflation and other factors are conspiring to brew a pot of strong fuel for more upward price action in markets for the world’s other favorite bean.

Cocoa Prices, November 2023 to Present

Like cocoa, coffee also shot up to dramatic yearly highs around the middle of last month before sharply dropping again. But as the current cocoa season is starting to ramp down, many coffee farmers around the world are just now beginning their harvest (with another due in the fall). That’s why the correction from April’s high could be due to reverse when the markets absorb the full breadth of the bean shortage and inflationary pressures increase globally.

Arabica Coffee Futures — April 2024 Rise & Correction

In the past six months and beyond, cocoa hasn’t been the only commodity responding to high inflation around the world. There’s gold, of course, with its steady string of recent all-time highs, but many other staple foods have been affected as well. Olive oil has ticked upwards — it’s up to $9,908 per metric ton from under $6,000 a year ago — and even after a correction, rice is way up this month as well.

But unlike rice, most of the coffee beans that Americans consume are grown abroad. Second only to Brazil and maybe Colombia as the world’s most prolific coffee producer, Vietnam grows Robusta, Arabica, Culi, Moka, and Cherri beans, providing around half of the world’s Robusta bean supply alone. But blistering heat and historic drought have all but wrecked much of this season’s crop. Not only does the country depend on coffee for income, but the US is one of the top three global destinations for its exported beans (the other two are Germany and coffee-obsessed Italy).

BREAKING #KC: Extreme heat with temps at 40-44°C CONTINUES in world’s largest grower of robusta & 2nd largest overall after months of severe drought already killed Big % of new 2023-24 crop & massively damaged flowering for 2024-25 !! Vietnam #coffee will not recover until 2026!! https://t.co/Mdg0UDKvPk pic.twitter.com/m0749lsOpj

— Maja Wallengren (@SpillingTheBean) April 29, 2024

Nearby Indonesia is experiencing similar issues, but Brazil is the world’s top producer and has managed to increase national production by increasing its share of Robusta, a bean known for its resilience and one that bucks the trend of requiring a biennial growing cycle like other types. But in a market with high volatility potential and Vietnamese supplies drastically reduced, all it takes is one major rainstorm in Brazil to make the coffee price breakthrough upward resistance and skyrocket to new peaks.

We’re still a way off from arabica coffee’s 2011 high of nearly $3.00 per pound, and the coffee market tends to have more liquidity than the cocoa market. But with the Fed and other central banks caught in an inflationary trap of their own making, we could easily see new all-time highs for coffee and other soft and hard commodities in the coming year or two.

As Peter Schiff recently noted in his interview with Anthony Crudele:

“It’s clear that rates are still much too low, and that’s one of the reasons I know that the inflation problem is going to get a lot worse, it’s not going to get better.”

And there’s an important psychological aspect to inflation. For example, it’s broadly recognized that when gas goes above $4 or $5, people start freaking out enough that it can lead to a political crisis where the incumbent administration does anything they can to suppress prices.

With much of America (and the world) hopelessly hooked on their morning brew, there could be a similar effect when coffee prices reach a certain point: The collective headache from unaffordable coffee will be a symptom felt by people — and markets — all around the globe.