Coffee (ICE: KCH5), cocoa surge to historic highs: What it means

2024 was a banner year for the commodities that make up tasty brown drinks.

Wholesale coffee (ICE: KCH5) prices climbed to near 50-year highs, and cocoa prices hit record peaks. The catalyst was mainly bad weather – both dry conditions and wet conditions. Perhaps global warming is rearing its ugly head.

Coffee needs tropical weather conditions and disease-free soil to grow. Brazil is the world’s largest coffee producer, accounting for about 40% of global supply. And a nasty drought last summer destroyed much of the country’s harvest. The same could happen this year too.

In Vietnam, the world’s second largest coffee producer, coffee crops got hit first with an intense drought and then heavy rains. 

Soaring coffee consumption in China also boosted prices. That drinking has jumped almost 150% over the past 10 years, according to the U.S. Agriculture Department, as Chinese consumers ascend to the middle class and develop middle-class tastes.

Given the extreme weather conditions stemming from global warming, volatility may continue in the coffee and cocoa markets. These moves obviously have significance for coffee companies such as Starbucks (NASDAQ: SBUX) and Hershey (NYSE: HSY).

Hedging against price increases

They can hedge against price moves by using futures and options. Hershey says it benefited from hedging higher prices this year. Meanwhile, Starbucks has gone the other way. It has cut its hedge against rising coffee prices by 80% over the past five years. That saves it money on hedging costs, but could cost it money if coffee prices keep rising.

The movement of coffee and cocoa prices doesn’t mean much for the overall economy, as coffee and chocolate account for only a tiny amount of the food segment of the consumer price index.

Food-staple commodities like wheat and grain along with industrial commodities like oil and copper have a bigger impact on the economy.

It’s also important to remember that commodities are inherently cyclical. Surpluses and weak demand one year often shift to shortages and strong demand the next. 

For the last 300 to 400 years commodity prices overall, including coffee and cocoa, have moved in sync with long-term inflation. 

There’s a good chance that will continue, regardless of what happens with global warming and how many Chinese turn into coffee drinkers.