Climate Change, El Nino And The New Parabolic Move In Commodities (NYSE:HSY)

A description of Parabolic market moves

From the stock NVIDIA (NVDA) to Bitcoin and even gold (GLD), there have been several major parabolic market moves over the last year.

Of course, the first Parabolic market ever noted was during the 1600’s Tulip Panic. This was driven by speculators trying to make a home run.

However, most recently during 2023-2024, no market move compares to the historic rise in cocoa prices (NIB). Cocoa has had close to a 400% return over the last year. This move has been inspired by global El Nino and climate related disease and weather issues to crops in West Africa.

Sometimes, a sharp rise in commodity prices can be inflationary. This is one reason why the Fed is “considering” now lowering interest rates as quickly as initially anticipated. Hence, the US dollar has made a bit of a comeback.

Coffee price explosion and inverse relationship of higher commodity prices to equities

In addition, certain equities can be adversely affected when commodity prices rise. For example, look at the price of Hershey’s (HSY) falling about 25% in response to higher cocoa prices. The fear is that consumer demand will fall as chocolate prices rise.

Now there is a new bull market in town–coffee. I alerted subscribers to my WeatherWealth newsletter in early March about the potential explosion in coffee prices. Our weather spider looks at fundamental analysis, the commitment of traders and technical analysis with scores ranging from (-4) very bearish, to (+4) very bullish. We then add those scores together.

A near record warm December and January in northern Brazil may have damaged Brazil’s coffee (JO) crop more than expected. But the real news has to do with record low irrigation levels in Vietnam and historic April heat reaching close to 100 degrees.

While Brazil produces high quality Arabica coffee beans, traded on the ICE exchange in America, Vietnam is the #1 producer of the cheaper variety Robusta coffee traded on the London exchange. One can see the ridge (H) creating drought in Vietnam currently. Rains are critical for proper coffee berry formation during their rainy season (April-June)

While many folks expect La Nina to form this summer, I am of the opinion that occasional El Nino conditions will persist until at least June or July. This and climate change is affecting tropical commodities along the equator and helped to cause natural gas prices (UNG) to fall 50% this winter. These so called weather experts that kept preaching about potential polar vortex’s this winter were wrong once again.

So, which equities may be adversely affected by soaring coffee prices. Here are just a few

1. **Starbucks Corporation (SBUX)** – As a major purchaser of coffee beans, higher coffee prices can impact their profit margins.

2. **Dunkin’ Brands Group, Inc. (DNKN)** – Before being acquired by Inspire Brands, Dunkin’ was publicly traded and could have been impacted. Now, it’s relevant to look into Inspire Brands’ portfolio for impacts.

3. **Keurig Dr Pepper (KDP)** – While diversified, their coffee systems and pod products make them sensitive to coffee price changes.

4. **Nestlé S.A. (OTCPK:NSRGY) (NESN.SW)** – Their Nescafé and Nespresso brands make them a major player in the coffee market, affecting their costs.

5. **J. M. Smucker Company (SJM)** – Known for their Folgers and Café Bustelo coffee brands, changes in coffee prices directly affect their bottom line.

6. **Luckin Coffee Inc. (OTCPK:LKNCY)** – A major coffee chain in China, which could see profitability affected by the cost of coffee beans.

7. **Coca-Cola Company (KO)** – With their acquisition of Costa Coffee, Coca-Cola has become more exposed to the coffee market, hence to the risk of rising coffee prices.

Conclusion

It is a shame that many soft commodity ETFs/ETNs were retired in June of 2023 because coffee prices may have another 20% upside in the weeks or months ahead. Nevertheless, using call option spreads in cocoa and coffee futures is the way to develop potentially conservative bullish strategies given El Nino holding on a bit longer and a warming planet brought on by climate change.

Finally, some equities that follow the price of soft commodities could be adversely affected.

Jim Roemer

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.