Over the last 3 weeks the US and Australian stock markets have taken a real beating with the Nasdaq and S&P 500 down over 10%. It’s largely tied to President Donald Trump’s policy moves, especially his aggressive push on tariffs and with the DOGE cleanup.
Trump’s been pushing other big changes including cuts to government spending, layoffs of federal workers, with a focus on “America First” policies. He’s framing it as a way to bring jobs and wealth back to the U.S, but in the short term it’s stirred up a lot of market chaos. Ironically, money has been flowing out of US indexes into European and Chinese equities. Over the last 4 weeks the German DAX has outperformed the SP500 by ~25%.
There is old trading adage that markets can handle bad news, but what they really dislike is uncertainty. Every day a new set of headlines and a new set of changes to tariffs, and no sign of any market support from either the Fed or Trump. Thus, the turbulence in equities may get worse before they get better.
Coffee
Brazil has just experienced 6 weeks of extreme weather including heatwaves and drought during a critical growth stage for the beans. Coffee beans abort and/or fail to fill leading to losses and quality downgrades to the 25 and now damage to the 26 crop.
At the end of January, before the start of the extreme weather, forecasts of 6 major firms (Safras, Procafe, IGBE, CONAB, Volcafe and one private firm) averaged 35.5 million bags of Arabica with the highest at 38.3, and the lowest at 34.4.
Based off the 2014 situation which was similar but less extreme, agronomists and growers alike are saying these production estimates need to be revised down at least 15-20%, which would put the Brazil Arabica production around 28-29 million bags, when in a good year they should be exceeding 50 million.
Above charts showing Root zone soil moisture. March 3rd 2025 on the left. March 3rd 2014 on the right. In 2014, coffee prices doubled after a similar and arguably less severe drought situation (Source:nasagrace.unl.edu/)
A global shortage is all but guaranteed at this point.
As a trader, I see the global Arabica shortage unfolding and it’s glaringly obvious once you dig into the data. Supply is reducing, demand isn’t dropping, and unless demand drops, the world is going to run out. But here’s the catch: markets don’t really move until enough people catch on. We hear reports that many Roasters are holding off buying until prices come down. They can’t hold off forever. Customers want their daily drug. Coffee prices are up this year, but nowhere near enough to ration demand to meet the supply reduction. I believe we are fast approaching a tipping point when the penny drops, panic sets in, the price goes parabolic. In this case, it will be the case of he who panics first, panics best.
It remains an explosively bullish setup. Arabica is currently trading around $3.90 a pound, and I expect before this shortage is over, we’ll see prices over $10. As a reminder, the inflation adjusted 1977 high when the world ran out of coffee is around $18.00 a pound.
Despite this, Coffee started and ended the month at almost the same price at $3.80. With global equities in freefall, anything not deemed as a ‘safe haven’ tends to get sold as margin pressures force selling. With the price of coffee not moving, our position gave up some of its profits last month. When holding call options, part of the option price is the time value, and since we have one fewer month until the July expiry date, the value of the options has reduced a little.
