The price of coffee, similar to other commodities, has soared in recent months. On an annual basis coffee prices on the stock exchanges jumped nearly 100%. This is the result of supply concerns and major transport problems around the world. Will such huge changes affect consumers of the popular morning drink? How much are we willing to pay for coffee? What are the further prospects for prices from the investor's point of view?
The weather is a key factor when it comes to coffee cultivation. Coffee must be grown in warm climates, on slopes where temperature fluctuations throughout the year are not significant. Therefore, the most coffee is grown in the highlands of South America, Southeast Asia and Central Africa. Nevertheless, the ongoing climate change is contributing to the occurrence of an increasing number of weather anomalies. Excessive rainfall, persistent droughts or high temperature amplitudes damage a large number of crops. This has happened in recent months in Brazil, which is the largest coffee producer in the world. Brazil is also the largest producer of Arabica coffee, which is mainly used in gastronomy.
Brazil experienced prolonged ground frosts this year, followed by droughts.As a result, many coffee trees simply died. Production drops in Brazil compared to the normal season will be counted in at least a few million bags, if not a dozen. As it may take a minimum of 2 years to restore crops, prices may stay at high levels for a longer period.
Pandemic and a period of low prices
The pandemic has led to an unprecedented situation in which virtually the entire catering sector has come to a standstill. Arabica coffee is consumed mainly in restaurants and cafes. The demand for this type of coffee has dropped dramatically, which of course translated into a decline in raw material prices, even to levels below 100 cents per pound. This, in turn, led to a situation where farmers abandoned their coffee plantations in order to earn money with other crops (e.g. coca) or seek happiness in other industries. Additionally, those who decided to stay had a problem harvesting due to the lack of workers. We observed such a situation mainly in the countries of Central America, where the highest quality coffee is produced, which in turn generates very high costs. As a result, Brazilian coffee started to be delivered on futures exchanges, which until now constituted a fraction of the deliveries. As a result, inventories in Brazil have fallen to their lowest levels in several years. Even with the current weak Brazilian real, which should lead to an increase in coffee sales from Brazil, inventories and production were too small to drive prices down in global markets.
Tight supply chain
The significant acceleration in economic activity following the first impact of the pandemic has made global supply chains strained like never before. There was a shortage of containers in India, which mainly contributed to the upward pressure on sugar prices, but also had some impact on coffee. In turn, in Brazil, the same ports are used for loading soybeans, sugar or coffee. Increased demand for soy or sugar from other regions of the world has led to the fact that delivery times have increased from the standard 30 days to even over 100 days in the worst cases! In addition, the cost of transport itself has increased several times!
Demand and supply from the rest of the world
The return of demand in the catering sector leads to additional pressure on limited supply. The trend of employees returning to offices is also visible, which will again lead to an increase in orders from distributors. Supply constraints are not limited to Brazil. In Ethiopia, the threat of civil war leads to supply problems. Prices in Cameroon are soaring to all-time highs due to insufficient port shipments. The weather has a strong impact on reducing potential production in Vietnam and other Southeast Asian countries.
How much will we pay?
The price of the coffee in a cup alone represents only 1-2% of the total price. Therefore, the annual increase in the prices of the raw material itself by almost 100% should not translate into strong increases in end products. The costs of transport and the services themselves are much more important. It is also worth noting the sharp increase in the prices of the highest quality coffee, the production of which dropped dramatically during the pandemic. The price of coffee is currently trading at its highest level in almost 10 years, but the price increase for the consumer should not be drastic. Depending on the region in the world, prices for consumers should rise from 5% to as much as 30% for specific types, methods of brewing coffee or, above all, the cost of services in the current environment of rampant inflation.
The price reached its highest level since 2012. Source: xStation5