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Coffee Rallies on El Nino Impact and Speculative Buying

Apr 11 2024

Cocoa prices have stolen the headlines in commodities so far this year, but meanwhile a similar story is unfolding in the coffee sector, where both arabica and robusta futures have experienced substantial rallies. Over the past six months, arabica futures prices have surged by almost 45%, while robusta futures have climbed by nearly 60% and set a 30-year record high in the first week of April. This piece explores the catalysts behind this price escalation and examines whether the coffee market might mirror the dramatic trends observed in cocoa.

Supply Concerns Trigger Upward Momentum

One of the primary drivers behind the robusta price surge is the El Niño weather phenomenon, particularly impacting Vietnam, the world’s top robusta producer. Forecasts from last year, such as those in this ChAI article, anticipated this impact as Vietnam usually experiences drought conditions during an El Niño cycle. The predictions have come to fruition, with Vietnam experiencing significantly drier weather over recent months. As reported by Barchart, on March 26th the Vietnamese agriculture department projected that the 2023/24 coffee production could plummet by 20% to 1.472 million metric tons (MMT), marking the smallest crop in four years. The Vietnam Coffee Association has similarly projected 20% year-over-year decrease in coffee exports, down to 1.336 MMT, further highlighting the supply issues facing the country.

Conversely, Brazil, the second-largest producer of robusta and the leading producer of arabica, presents a more positive production outlook. The country is poised for its third consecutive year of increased coffee production, a rare sequence that has occurred only seven times in the last 144 years, according to Reuters. This growth is largely attributed to robusta production, which lacks the biennial production swings typical of arabica and is predominantly cultivated in northern Brazil, where it is less susceptible to damaging winter frosts.

The International Coffee Organization’s latest report highlights the contrasting fortunes of the two coffee grades and their respective producers. Total green coffee bean exports reached 10.43 million bags in February 2024, up 9.5% from the previous year. Notably, Brazilian natural arabica exports soared by 36.6% year-over-year. However, exports from Vietnam saw a decline of 19.7%, dropping to 2.73 million bags from 3.4 million in February 2023. This downturn has led to an overall decline of 3.7% in robusta bean exports for the month.

Robusta stocks april 24

ICE Robusta stocks, shown in ChAI Insight

Moreover, current coffee stocks are low compared to historical averages. Although registered ICE robusta stocks have recovered from the record lows seen in February, they remain about 57% lower than last year, around 3100 bags. Arabica stocks, while also below average, are only 15% lower than the previous year at 621,870 bags, demonstrating the greater supply pressure facing the robusta market at this time.

The supply data indicates the present rally in coffee is being driven by the issues in robusta production, with arabica prices being pulled up as a result. However, there is a further factor to consider which connects coffee to fellow soft commodity cocoa.

Speculators Betting Big on Coffee

The price rally in cocoa over the past 18 months has been historic, but prices and consequently the available capital required to trade cocoa contracts are now so high that most speculators have left the market. It appears, however, that in searching for the next potential commodity bull run, many have decided that coffee is the next futures market to invest in.

In the week of October 24th, Managed Money positions on arabica coffee futures switched from a net-short to a net-long for the first time since June, as shown on the graph below. The Managed Money net-long of 8,452 on October 24th has since expanded to 58,878 by the week of April 2nd. In the robusta market, money managers have not held a net-short position since January 2023. Nonetheless, between the weeks of October 17th to April 2nd, this group’s net-long position has similarly expanded from 10,447 to 44,150.

The surge in long positions shows the weight of sentiment among speculators that coffee prices have further room to climb. It would seem unlikely that coffee could replicate the magnitude of the cocoa run at this stage, but it is worth noting that robusta prices are already at their highest since 1994 and arabica prices are fast approaching the peaks set in Q1 2022.

Arabica coffee cot report 2nd april

Managed Money positions on ICE Arabica Futures, shown in ChAI Insight

Consumer Impact

As the wholesale benchmarks track higher, it is a matter of time until the increases are passed on by businesses, whether they are industry giants or small independents. In the former camp, Lavazza recently announced a 14.9% drop in its 2023 core profit due to “a sharp increase in the cost of coffee beans and its decision to limit price increases”, according to Reuters. Not all coffee manufacturers will choose to absorb increased costs in this manner. Lavazza has a reputation for high quality coffee and has traditionally been a more expensive option for consumers. Prior to the recent increase, Lavazza was therefore likely operating with a greater profit margin than those producers who are competing at the cheaper end of the market, where margins will already be under greater threat from the recent rally in wholesale prices.

For small independent coffee roasters and manufacturers, the challenge will be staying in business without having to raise prices to the point where customers turn away. A row has recently broken out in the Australian press over this very issue after Lachlan Ward, the chief executive of St Ali coffee roasters, declared that Australians should pay a minimum of $5.50 (£2.85) for a cup of coffee, as reported in the Guardian. Ward argues that independent coffee shops, who like other small businesses have already weather high energy prices and interest rates in recent years, need to raise their prices to protect their own future. The furore that has developed around this issue in Australian heralds a choice that many people will have to decide in the near future; how much are they willing to pay for their cup of coffee?

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