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Key lessons from the coffee market in 2024 – a retrospect

Writer's picture: Igor BragatoIgor Bragato

2024 was a historic year for coffee where prices rallied above $3 to an all-time high for the market.  While this price was not as crazy as highs in the 70s and 80s when adjusted for inflation, this was a dramatic bull market that rocked an important psychological resistance.  Moreover, a year ago, it was not at all clear that the bull market was going to continue, in fact we were in something of a bear market. 

 

Since it can be easy to lose the forest for the trees when in the midst of a historical moment like in cocoa or coffee where new records are being set, we wanted to take this opportunity to analyze what happened.  With this information, we will be able to improve our forecasts for the future. 


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Think in 80/20 

My first lesson from 2024 is to focus on the 80/20.  The 80/20 Rule, the Pareto Principle suggests 80% of outcomes often result from 20% of causes. In coffee, this means that we need to tune out the noise and think about what are the big movers and shakers in the market. 

 

When digesting the news cycle, forecasts and datapoints, we need to identify the 20% of variables that will affect 80% of the price action.  

 The information flow was fast and furious last year with hundreds of different variables: 

  • Inverted Spreads, fluctuating diffs, certs dropping to lows and recovering, EUDR preparation and delay, surprise export figures, missing stocks, delayed logistics, rains/lack of rains, frosts and hot temperatures, port strikes, currency crises, conflict in the Red Sea and beyond, trend following signals, and hedge funds. 

 

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Thinking in 80/20 helps us to identify the few key variables that will dominate the price action. Last year, for example, what culminated in the 2024 bull market was: 

1) Balance sheet  

  • As fundamental based traders, we look to this more than anything else.  Successive years of cumulative deficits in the Arabica balance played a major role in the rally. 

2) Key inventory levels 

  • Environment of low Arabica stocks globally 

  • Consecutive years of deficits in an inverted market 

3) Weather shocks: dryness and (especially) heat during key periods of the Brazilian crop 

  • Leading to realization of smaller crop, when the market needed a big one the most  

 

Focusing on these movers helped to anticipate some of the major market moves. 

[EXAMPLES] Differentials and reports indicated that Brazil stocks were low by Oct 2024.  Shortly thereafter, the market rallied.... 

Dry weather and high temperatures persisted across Brazil all summer, but it began to be clear by Sep (4th month of dryness) that the 25/26 crop would be affected.  Given the already tight balance sheet, the market could ill-afford to lose more coffee. 

 

Lesson number #1: prioritize the most important market drivers  

 

Weighting the Variables 

The pareto principle works, and it was particularly relevant for coffee in 2024, because some variables have a disproportionately larger effect than others. Attributing different weights to variables during your price forecast is crucial because not all factors impact the market equally. 


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An exaggerated example would be comparing a disastrous Brazil crop to a disastrous Costa Rica crop. They both are important for the coffee market, but Brazil would have an outsized impact, as Costa Rica produces ~1.5m bags a year, merely half a month of Brazil exports. 

 

One difficult scenario to weight in 2024 was the impact of cert stocks compared to global stocks. Certified inventory enjoyed quite a recovery in 2024, yet the market actually rose. Rising certs are almost always considered a bearish data point, so what managed to overwhelm this? 

 

First of all, certs were already on the lower end of historical range (<1m), so the recovery was a good sign, but stocks are still relatively low by historical levels. Additionally, total stocks (certs and non-certs) are still very low globally, and in Brazil, the world’s largest producer of coffee, those low levels may be near crisis-lows. 

 

So, in this case, while the direction of certs was bearish, the overall impact was significantly outweighed by the absolute state of stocks, and the significant state of Brazil stocks. 

At the end, what had the most weight to determine prices was total stocks to use, rather than the more visible stocks to use offered by the certified inventory. 

 

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Lesson number #2: weight variables accordingly 

 

Drawing Conclusions Ahead of The Mainstream 

The ability to gain insight into what’s happening on the ground, with crops, stocks and domestic prices is a big advantage in coffee. One of the key ways that we do this, is by looking at the weather. Since Coffee is an agricultural good, weather (and in particular rainfall) play a key role in determining what the coming output will be. 

In 2024, those who saw the reality on ground after the Brazil flowering, and those who were informed about the damage done by the heat were in a much better position than those who didn’t have the same info. In the same way, those who did the SnD math, and were informed about low stocks in Brazil (confirmed by Brazil diffs) had the chance to prepare ahead of the mainstream. 

That’sone of the main factors that gives the big tradehouses an advantage in coffee over the smaller players. Having operations and contacts in the key origins and destination markets across the world allows for privileged access to information. 

 

This is actually one of the services that our business provides to those smaller players, we serve as a way of connecting diverse coffee business with a dedicated research desk that compiles global information [LINK] 

 

Lesson number #3: Weather and connections to origin will help you stay ahead of the fundamentals 

 

Pay Attention to Technicals – They Can “Save” You 

Just because we are fundamental traders, this doesn’t mean that technicals are not important. To the contrary, technicals can often save us from insisting on a wrong view. Technicals are about observing price action and trends. 

 

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When we observe that prices are behaving contrary to our expectations, this gives us an opportunity to rethink whether our view is correct, or whether we are missing something that the market is seeing. 

 

Back in late March 2024, the rally above the 200c resistance served as a key leading indicator to a potential leg higher in the Arabica. The next key resistance was only at 236, and that’s where the rally paused 

A selloff (235c to 195c) followed the rally, but ultimately, it did not reverse the larger trend. Instead, a bullish trend channel was formed around July, and never broken until late Nov. The breakout was a bullish one, which opened coffee to blue sky.  

 

So, in essence, the technicals help us to quantify price trends and gain concrete signals as to when those trends are changing (and whether we are being left behind). 

Lesson number #4: technicals keep you honest, and ensure you haven’t missed something crucial 

 

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Keep it Simple 

After events have passed, it’s easy to look back and state them as “obvious,” but understanding what the big moving events are as they happen in real time is far more difficult. In a market where news spreads quickly, various opinions are expressed, and countless datapoints must be considered, it’s easy to become overwhelmed or distracted from what truly matters. 

 

To make things harder, forecasting prices and managing risk are only a couple of the many skills necessary to being successful in the coffee industry. Not everyone can be an expert on markets and even the experts are often wrong. 

 

In coffee, the best analysis is often the simplest because these analyses focus on the most essential and impactful factors (the 80/20), without delving into unnecessary complexity. Last year we saw this with the lesson of comparing SnD + stocks + Brazil weather. 

 

Complexity can obscure key takeaways, making it harder to act on the findings. Keep it simple and focus on the big picture. This means being concerned first and foremost with the global supply and demand, while using weather to try to predict big changes.  But also stay humble, the technicals will provide warning signs if there is something that we are missing. 

 

Humility is important in coffee, because our little market has a way of confounding the experts, and reminding all of us to go back to the basics: focusing on the 20% of factors that influence 80% of the market. 

 

Lesson number #5: simplicity is key 



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