Spend Matters welcomes another guest post from Jo Allen of Mintec.
In November we wrote about the falling prices of coffee. Now, only five months later, things have certainly changed.
After nearly three years of falling prices, Arabica coffee prices on the ICE took a turn in the opposite direction towards the end of last year and have now shot up over 35 percent since the beginning of 2014.
So what changed so dramatically? Brazil is the largest producer and exporter of coffee. The country accounts for about 26 percent of world trade, exporting over 1.6 million tons annually. At the beginning of the year, Brazil started suffering from a drought in the southern part of the country, where the majority of coffee plantations are. The driest and hottest January on record wilted the coffee crop. The situation didn’t improve in February, even though there have been some welcome rains recently.
The drought has had a marked effect on this year’s coffee production. According to Brazil’s National Coffee Council, the 2014 harvest is expected to be a conservative 2.5 million tons - down over 20 percent compared to last year’s bumper crop of 3.1 million tons.
The other bad news for coffee lovers is that the global demand for coffee is going up as it becomes more popular in emerging markets. Chinese consumption is up a staggering 29 percent year-on-year following a few years of consistent rises. The country has more than doubled its consumption in three years, from 55,800 tons in 2010/11 to 120,000 tons in 2013/14. Brazilian desire for coffee is also growing. Domestic consumption in the country has been rising by 3 percent each year for the past few years. This factor, combined with the lower production, could cause a supply deficit for the first time since 2010/11.
All this comes after several years of increasing record harvest levels. Over the last two years, Brazilian coffee prices have been at record low levels, helping to fuel the increased demand. Technological enhancements and mechanised harvests have assisted Brazil in moving their coffee production away from the more traditional ‘bi-annual’ cycle and allowed for more consistent production year on year. Improved plantation management have also helped reduce the gap between the “on years” of high production and the “off years” of low production to 5 percent, between 2012 and 2013. That gap has been as high as 40 percent in previous years.
So what is the future of coffee prices? As this year’s production has already been affected by the drought and demand is still on the rise, it is hard to see the prices dropping anytime soon. Getting going in the morning has just gotten that little bit harder.