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