As we all know too well, Mother Nature can affect everything from the food we eat to the roof over our head, and everything in between that we depend on her for. Recently, we have written about the situation affecting Jamaica since that is where our coffee farms are located, but as March comes to a close the largest Arabica producing Region in Brazil is suffering a major drought. A forecasted lessened supply has the speculators on the C Market scrambling with uncertainty, and so it brings a rising cost of Green Coffee. Being that coffee is the #2 commodity traded globally, second to only Oil, the futures forecasters watch closely as crops develop, and begin to predict the prices in future markets.
An article from last week in The Guardian.com has several good points concerning Brazil’s current situation. Last month the worst drought in decades hit Brazil’s coffee belt region, destroying crop yields and causing the price of coffee to shoot up more than 50% so far this year. The drought is historic, forcing more than 140 cities in Brazil to ration water. Newspapers reported that some districts are receiving water only every three days.
For now, retail prices for coffee are stable. Roasters typically have enough supplies to cover themselves for a few months. But if the price of the arabica beans continues to rise, consumers could start seeing the cost of their morning coffee creep up later this year, according to Jack Scoville, a futures market analyst specialising in grains and coffee, among other commodities. Last Wednesday the price per pound (0.45kg) of coffee for delivery due in March reached the highest point in about 14 months, at $1.72.
Even before the drought, concerns arose that there would be a global coffee deficit. At the beginning of the year a closely watched report by a commodities trading firm noted that the global coffee market could face a shortage for the first time in three years. The report predicted coffee supplies will be about 5m bags lower than consumption for the 2014-15 season. This was an about-face from what experts were saying at the end of last year, when there appeared to be a coffee glut. There was so much coffee last year that arabica coffee futures fell by nearly 25%.
The good news for now is most of the larger suppliers such as Kraft, Smuckers, and Green Mountain coffee have their supplies to hold them through 2014 since they buy enormous volumes on futures nearly two years in advance, so that may more than likely mean retail prices will be stable to a degree. The smaller roasters will see the effects since they are are usually only able to purchase 3-4 months at a time and may be forced to raise prices due to the rising cost of green coffee. In the long run, though, experts say that the price of coffee will rise for one simple reason: more people in developing markets such as Brazil, India and China are acquiring a taste for it, and instead of being producers, these countries are becoming consumers as well.
Arabica Coffee being Picked by hand
Regardless of what happens in Brazil now … we will see higher prices and more competition for higher-quality coffee. It used to be that the developing world made coffee and the developed world drank it. But now countries such as Brazil, which traditionally only produced coffee, are starting to consume it, too. More people are drinking coffee, and more people are drinking better coffee. Since quality Arabica is hand picked and slower growing than Robusta Coffee, production is hard to mechanise and so it is likely that demand will continue to outstrip supply. You can see the major differences between the two coffee types HERE for a better understanding.
There are also some rumors of speculation regarding the drought. Here is a link to some statistics from I & M Smith regarding the rising cost of green coffee. There are those who have the opinion that the excess supply of Robusta in Vietnam is a source of this suspected shortage of Arabica coffee. They believe the drought is a situation created to create a shortage of Arabicas and justify roasters going back to using Robusta in order to keep prices down. This would unload Vietnam of their supply and even out the market, and perhaps drive the price of Robusta up since there would now be a demand. This of course is more or less a conspiracy theory at this point, but still worth noting in regard to the rising cost of green coffee.