A surge in green coffee prices may soon begin percolating into costs paid by consumers for their daily caffeine fix, in the latest sign of how hot commodity markets are affecting the broader global economy.
Coffee bean prices on international markets have surged as crops in top producer Brazil have been damaged by the worst drought in almost a century, leading to the first supply shortfall in the coffee market in four years. Anti-government protests in Colombia halted exports earlier this year, further pushing up markets.
At the start of June, the futures benchmark in New York for arabica, the high-end coffee bean, hit a four and a half year high of almost $1.70 (€1.44) a pound, up almost 70 per cent from a year before. Prices have since slipped to about $1.50 a pound – still a marked increase from 2020.
The devastating drought "has really had a significant impact on the [coffee] crop this year," said Saxo Bank head of commodity strategy Ole Hansen.
Other commodities such as iron ore, corn and oil have all shot higher this year, something economists say is trickling down to the economy at large as producers raise the prices they charge consumers.
Roasters and coffee buyers tend to have forward contracts with their suppliers which insulate them from price volatility for about three to nine months. Subdued demand for coffee from cafés and restaurants because of lockdowns also meant that they may still have some inventory on hand.
However, when those price agreements come to an end and economies open up, many roasters are looking to sign new purchase agreements at sharply higher bean prices, which may then be passed on to customers at supermarkets or coffee shops, analysts say.
Previous contracts
"We're still delivering coffee from previous contracts. It's the next set of deliveries that's going to start being more expensive," said Stephen Hurst, founder of Mercanta, which trades speciality beans for high-end roasters. "The wholesale and retail prices will start to react between now till the end of the year," he added.
Martin Deboo, analyst at Jefferies, said European retail coffee prices had been stable for the first half of the year, indicating that roasters were still covered by forward price contracts with their suppliers.
But he said that prices were likely to start rising over the next few months: “As we move through the summer, people’s covers will start to run out.”
There are some signs that higher prices are starting to reach the consumer. Tchibo, the German retailer, announced that it would raise prices by 50 cents to €1 a pound from this month, while JM Smucker, the US food company behind Folgers and Dunkin' coffee brands, said it was planning to increase prices across various categories, including coffee.
For cafés, the rise in coffee prices will come on top of wages and other costs, which are climbing. However, the cost of coffee accounts for a small portion of a cappuccino or latte sold in a café, with rent and labour normally accounting for more than half the cost.
Some roasters and coffee retailers may wait to see how the economic recovery plays out and how consumer demand recovers before making a move on prices. While at-home coffee demand jumped amid the lockdown, it decimated sales for restaurants and cafés especially those reliant on office workers.
Nespresso, Nestlé's premium coffee division, said that in the US it was taking wait-and-see approach, and to see how long the high prices in the coffee bean market were sustained.
Brazilian crop
On the supply side, while the current Brazilian crop is forecast to be poor, the country's record harvest in the previous season means growers and exporters still have inventories in warehouses, said Carlos Mera, analyst at Rabobank, who added: "There's plenty of coffee in Brazil."
Nevertheless, the big logistical bottlenecks caused by the problems with shipping have led to growers and exporters hanging on to their inventories. A shortage of containers and ships has caused a worldwide backlog of cargo of commodities and other goods, and shipments which normally take four to six weeks for example, are taking double the time, according to coffee traders.
“It’s a big headache,” said Mera. There is plenty of coffee waiting to be shipped from producing countries, where the protests earlier this year interrupted the coffee flow, he added.
In Colombia, for example, production is expected to be unaffected by the ravages of Covid-19, but because of the domestic and international logistical issues, export flows "will need at least two months until things get back to normal", said Roberto Velez, the chief executive of the Colombian Coffee Growers Federation.
Uncertainty is also lingering over consumer buying habits in the wake of the coronavirus crisis. Marex, the commodity broker, expected post-pandemic coffee consumption to rebound this year, "but not to the pre-pandemic trajectory". "Demand is the big question mark. It's not as robust as some people think it is. It's really mixed," said Hurst of Mercanta.
Hedge funds
Meanwhile, traders are also keeping an eye on the moves by hedge funds, which piled into the arabica futures market, exacerbating the price rise. Although their positions have since declined, the Commodity Futures Trading Commission’s data show that financial speculators in early June accumulated a large net long position - a bet prices will rise - equivalent to Colombia’s annual production.
“Some of the drama we’ve seen in terms of the change of the price has to be attributed to these huge capital inflows we’ve seen coming in from non-physical players,” said Maximillian Copestake at Marex. – Copyright The Financial Times Limited 2021
