Navigating the $4 Coffee Market

Four dollar market. For most of us, we never thought we would write those words during our entire careers. Through the early part of 2025, Arabica coffee futures have rallied 30%, reaching a high of $427.35 US cents/lb basis the soon to be expiring March contract. If we had gone through the whole year, 2025’s rally of 101 cents/lb would place 3rd in the last 30 years (behind the 2010 commodity supercycle, 2024’ rally and ahead of the 2021 frost rally). All that in 27 trading days. To call the rally unprecedented is an understatement. The rally is shocking, historic, heartbreaking, career-making and a Godsend for some. Four years ago, the coffee industry’s worries stemmed from the plight of producers, unable to sustain a living income, being forced to abandon homes and farms as they no longer felt like they had a way to go on. We are soon coming face to face with the plight of the roaster, being choked by ever-escalating prices and no longer able to sustain their business of bringing happiness to our dreary mornings. 

Over the last several weeks in Ilya Byzov’s weekly reports, he has written of the three largest factors responsible for futures prices going higher. These are a lack of liquidity, roasters being under covered, and commodities seeing renewed interest due to the risk of trade wars.

The most important one of the three factors above is arguably liquidity. Coffee futures do not compose the whole of the coffee market or the global coffee trade. They are a benchmark, and they include owners who are financial institutions with little or no operating knowledge of the underlying commodity. The average number of outstanding futures contracts in coffee (called Open Interest) is 237,282 contracts, representing 67 million bags. Compare this to an annual coffee market demand of 153 million bags averaged over the same period. This means that not all coffee that is produced is hedged, even when it is sold to the final user.

For a contract to be entered in the exchange, there needs to be a buyer of the contract and a seller. Fifty to sixty percent of the buyers and sellers of coffee futures in the market do not operate in the physical coffee space. Their involvement in the market is for passive long-term or speculative short-term investment. What they provide for the rest of the participants is liquidity – a way to buy or sell coffee futures without always having to secure a buyer or a seller of physical coffee. Each side provides liquidity by indicating their intention to buy or sell a futures contract through a bid and an offer. When bids and offers are crossed, a contract is created. This means that a cooperative hedging coffee in Brazil and selling a future doesn’t need to wait for an importer to buy their future, but instead can find the closest bid from an Index fund buying a future because they received $10 million of inflows from their Commodity portfolio. In a normal market environment, having multiple participant types all buying and selling futures at once creates a more efficient pricing structure.

In 2025, liquidity has reduced and became one-sided. This means that the depth of buyers at various bids in the market doesn’t always match the depth of sellers at various offers. The most traditional buyers of futures are Non-Commercials (or specs/speculators) and Roasters. The most traditional sellers of futures are Trade Houses and Origin (farmers). 

On the buy side, speculators have had more reasons to buy coffee: technical breakout, news headlines and increased risk of trade wars make equities look less interesting and commodities look ‘safer’ as an investment. Roasters, who for the most part are under-covered after failing to take advantage of Index rebalancing (See Ilya's Market Report for 21 Jan), are also likely to be buyers of futures any time the market moves lower because they need enough futures coverage before their contract enters the delivery period.

However, on the sell side, trade houses have had less ability to sell coffee; and, the higher prices go, the less coffee trade houses can sell. One big reason is margin calls, which is essentially a transfer of cash to a bank account that one must hold if their futures position starts losing money relative to the market (even if their physical part is making money). Another factor is inventory costs and the cost of financing. Buying 1 million bags of coffee from Colombia and selling it to a roaster in Germany 3 months later in a $1.50 futures market is $198 million of working capital, and at an interest of 2% would be $992k for 3 months carry. Buying the same 1 million bags at $4.25 is $562 million in working capital, and at an interest of 8% is $11,244k for 3 months carry. This means a trade house operating in a $4.25 market at 8% has to either make $10.2 million more on the same trade flow to cover the financing cost or must reduce the amount of coffee that they trade (assuming they have the bank relationships to increase their credit lines 283%).

Farmers, with prices at all-time records, should have all the reason in the world to sell coffee right? Certainly, so long as there is someone to buy the physical. Due to the above explanation, there are fewer opportunities for those sales than in the past as trade houses decrease their trade flows to meet cash flow requirements. More importantly, producers who have always been able to sell coffee crops in the future no longer do so. This is due to backwardation. As of today, the difference between the nearby March futures contract and the September futures contract (representing the first available contract of the 25/26 Brazil Arabica crop) is 27.00 cents. This is a record discount for selling coffee forward. For a producer who has seen nearly 12 months of coffee prices moving higher and higher, the thought of taking a discount to sell forward coffee doesn’t work. What is the need to chase? The estimated profit margin of a medium farm in Brazil is $300/bag of coffee sold (medium farms in Brazil produce 5000 bags). Over the past 12 months, the market has gone higher and higher, making farmers’ unsold coffee stocks more valuable than the Reais they hold in their bank account (which come with a whole range of views on Brazil’s global standing and the worry about government and taxes). Coffee has become psychological gold for the producer that they are not willing to part with. If something you had doubled in price over the past year, would you be inclined to sell it? At what price?

Overall, if you’re getting the sense that the coffee market isn’t behaving like a market, you’re onto something. A vacuum of liquidity can disrupt normally well-functioning and efficient markets, transforming them into volatile, self-reinforcing echo chambers detached from the fundamentals that they represent. While a gap between supply and demand balances kicked off coffee’s 2024 rally, higher prices have meant headlines and investor interest (and then more headlines and more investor interest), fewer and fewer covered roasters, more and more satisfied suppliers, and tighter and tighter trade finance, all combining to sap the market of liquidity, introduce massive risk to hedgers and effectively decouple the market from its fundamental foundation. Unfortunately, this signals even more volatility. It works both ways – up and down – and the liquidity that extinguishes volatility requires participants to both understand and trust the market, neither of which is likely to be true in the near term. I’m sure everyone is looking forward to when the four dollar market is a story to tell and not a beast to slay.

_{Ilya Byzov is the Head of Research & Quant Trading based in Sucafina North America’s New York City office. He has 14 years of experience in commodity futures markets and 11 years in coffee specifically. Previously, he held positions in Market Risk and Coffee Research. In addition to his work on market forecasting and analytics, Ilya also works with commercial and specialty customers.}

_{Ilya is extremely passionate about sustainable supply chains and believes that the coffee industry should be a leader in equitability and transparency among agricultural commodities.} 

_{This is an updated version of an article originally published in February 10, 2024.}