Russian aggression affects coffee prices

Ukraine and Russia as coffee importers

War causes a lot of uncertainty in the markets, especially when both sides of the conflict are also important producers of key raw materials. However, it is also worth remembering that Ukraine and Russia are also importers of many products from other countries such as coffee. Russia and Ukraine may not be the key recipients of this commodity, but the recent geopolitical turmoil is affecting markets that have experienced many problems recently.

Russia and Ukraine import around 5.5 million bags of coffee beans, with global imports amounting to 130 million bags. The entire world consumes around 165 million bags of coffee a year. Therefore, Ukraine and Russia import accounts for approximately 4% of entire coffee imports and 3.3% of all world consumption. These may not be large amounts, but given the scale of the current global tensions, they may have a significant impact on the market.

In addition, Russia and Ukraine are significant consumers of instant coffee, most of which is produced externally. As a result, the importance of these two countries in the market increases. With imports from Ukraine almost stopped, possible problems from Russia and even nearby economies, the situation becomes confusing.

But that's not all. The cost of transporting coffee is increasing due to the price of crude oil and the price of aluminum which is used to produce packages, mainly cans. High coffee prices may affect not only these two countries but other nations around the world. Russia and Ukraine import coffee mainly from India and other Asian countries.

It is worth mentioning that Brazil added Russia to the high-risk category. Russia will have to pay for deliveries in advance, similar to Syria, Libya and Iran. In addition, three European coffee traders indicate that they will no longer accept orders from Russia due to the sanctions and the huge weakening of the ruble. Brazilian traders point out that excluding Russia from SWIFT is a problem, but there are other ways to pay as well. In this case, some point to cryptocurrencies, although it will certainly not be accepted by all parties.

Worldwide delivery problem is diminishing

It turns out that the supply situation is improving around the world. The lack of containers, problems at ports caused uncertainty on the market as a result stockpiles fell to the 20-year low. However, inventories started to increase slightly. Brazil uses ships for deliveries in which the goods are stored in bulk, and not in container ships as usual. Of course, this can reduce the quality of the coffee and also lower its prices (although high-quality coffee from Central America may be even more expensive).

The level of coffee stockpiles stabilized at least for the moment. Source: Bloomberg

Position reduction caused by the war

Bloomberg also reports that global investors are reducing their coffee positions to pay for margin calls in other markets caused by the increased volatility. On the other hand, it is difficult to assess what losses may occur on the demand side. In this case, inflation remains the key factor. High prices could negatively affect consumption of coffee in some countries.

Coffee price fell more than 12% from the recent highs and is testing local support at the 61.8% Fibonacci retracement of the last downward wave. However, key support is located in the zone between 210 and 200 cents per pound, and coincides with the upward trend line. If inventories begin to rise, the price of coffee may reach this support. In addition, it is also worth remembering that the market is still extremely overbought. If the position reduction will be significant, as it was in 2016, the price may experience a sharp correction. Source: xStation5