Traders are heavily betting on a price decline in one of the world's most popular breakfast items: a morning cup of joe.
Bearish bets have driven coffee futures down more than 17 percent since the start of the year, bringing the price close to a five-year low. Three factors have contributed to the negative outlook, including a growing crop base, a weakening Brazilian real and ongoing trade tensions between the U.S. and China.
At the same time, prices for frozen concentrated orange juice futures are soaring this year on a gloomy outlook for Florida's orange growers, which are still struggling to recover from a devastating storm last year.
Many analysts had projected coffee futures to rise in 2018 after slumping nearly 8 percent last year. Instead, coffee prices have fallen steadily since hitting $1.71 a pound in November 2016 – dropping 36 percent since that recent peak.
Just this past month, the International Coffee Organization's composite indicator, a benchmark averaging prices across the world, fell more than 3 percent, to $1.07 per pound – its lowest monthly average for July in more than a decade.
And investors have placed huge bets that prices will continue to fall. According to the latest report from the U.S. Commodity Futures Trading Commission, net short positions in the coffee market hit a record of 91,000 at the beginning of August. That's five times greater than any other year. Just 12 months ago, net shorts totaled merely 30,000 contracts.
Put it another way, the current net short position is equivalent to 25 million bags of coffee, or half of Brazil's expected crop for the year.
"We may never see this market with this many short contracts in a very, very long time," said Shawn Hackett, the president and CEO of Hackett Financial Advisors, an agricultural commodity analysis firm. "It's breathtaking...and we could ultimately witness a tremendous unwind effect."
Yearly coffee production in major markets since 2013
International Coffee Organization July 2018 Market Report
Weak currency, weather weigh on prices
Analysts and investors have attributed the pressure on coffee futures to the weakening currency in Brazil, the world's top producer and exporter. And, over the past three months especially, the decline in the Brazilian real has closely mirrored the fall in coffee futures.
Since the start of 2018, the currency has dropped more than 17 percent against the U.S. dollar amid concerns over the nation's fiscal outlook and a stronger U.S. dollar. The Brazilian currency's plunge against the greenback is among the worst of the major emerging markets, trailing only Argentina's peso and Turkey's lira.
While a truck drivers' strike this past May and a smaller crop hurt coffee exports in the first part of the year, Brazilian production picked up in June, hitting 2.55 million bags. That was 48 percent higher than in May and 16.5 percent higher than June 2017. Coffee prices fell across all major growing regions last month, but coffee exported from Brazil saw the largest declines, down more than 4 percent last month.
Additionally, with Brazil historically home to regular rains in November and December, coffee prices could remain suppressed through the end of the year.
Market's potential whipsaw
Some analysts, though, believe coffee prices could be due for a sharp rally, arguing that the commodity's weakness masks strong fundamentals. What's needed is a change in a macroeconomic story line or a weather event – a prolonged drought in Brazil or another key production hub that could stunt next year's crop and bring in lower-than-expected harvests.
Hackett said Brazil's elections in October and the prospect of new leadership could launch a spirited rally for the real – and, as a result, for coffee prices – into the end of the year. Easing of tensions over trade between the U.S. and China could also boost prices.
Still, even with heightened demand in recent months, other analysts said ample supplies for the current crop year and strong prospects for a larger crop in the next harvest year will likely continue to weigh heavily on prices.
"We're going to see these low prices certainly for the next six months - that won't change," Robert Babington Smith, a senior trader for California-based importer InterContinental Coffee Trading, told CNBC. "And we may well see some impact in Central America, Colombia, and Peru, as the commodity is trading well below the cost of production."
Diverging breakfast beverages
As coffee prices have slumped, a rival breakfast drink has made surprise gains heading into the fall. Frozen concentrated orange juice futures have surged more than 14 percent since the start of the year, making it one of the best performing commodities.
Higher prices have been bolstered by forecasts that Florida, the top orange-growing state in the U.S., could have its lowest output in 75 years. While orange juice futures did hit a six-week low on Monday, analysts said Florida's citrus industry will still take months to recover from the damage from Hurricane Irma last year.
The commodity has also been targeted by the European Union in the ongoing trade dispute with the U.S., further hiking prices. Orange juice was among the $3.4 billion of U.S. goods flagged in retaliation for duties the Trump administration has imposed on European steel and aluminum.