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Arabica coffee futures in the US traded around HKEX:194 per pound after hitting an over 6-month high of HKEX:205 on April 18th, on some profit-taking prompted by the recent rise amid low stocks and concerns that the slowing global economy could hurt coffee demand. On the supply side, the latest data showed ICE monitored arabica coffee inventories fell to a 4-1/4 month low of 700,048 bags. Meanwhile, dealers have said exports from key origins such as Brazil and Colombia were slumping. The International Coffee Organization projected another year of strong supply deficit in the coffee market, with a shortfall of 7.3 million bags, mainly due to arabica crop woes in Latin America's top producer.
What moves coffee prices?
There are several major factors that could affect coffee prices. If you are going to trade coffee it is important to understand the dynamics that drive prices.
The ‘Big Four’
The largest buyers of coffee beans on the international markets are known as the so-called ‘Big Four’: Nestle (NESN), Kraft (KHC), Procter & Gamble (PG) and Sara Lee (SLE). Together, they purchase around 50% of all the coffee produced globally. They primarily buy Robusta beans, so their activity exerts a strong influence on prices.
Climate
As an agricultural commodity, coffee production is largely determined by the impact of weather conditions on sensitive crops. If the climate is conducive to growing coffee plants, prices can drop, but an unfavourable climate can cause prices to rise.
This is because good weather during the growing season can increase the supply, while adverse weather conditions can damage crops or hamper their growth. As the five largest producers account for around 65% of global supply, weather conditions can have a significant effect on supply and, in turn, pricing.
Arabica coffee prices soared to 10-year highs in late 2021, as drought and frost reduced output in Brazil and heavy rains affected production in Colombia. ICE-certified stocks fell to their lowest level in 22 years.
Plant disease
Agricultural commodities are also affected by other risks that can influence the condition of plants, such as disease.
‘Coffee leaf rust’ is a disease caused by a fungus that can devastate coffee crops. Robusta beans are more resilient than Arabica beans, which are more delicate and susceptible to damage from bad weather or disease.
For example, global coffee prices rose sharply in 2013 after coffee leaf rust damaged crops in Central America and reduced supply. It was estimated that around 70% of Guatemala’s coffee production was affected.
Consumer habits
Coffee drinking trends are a key driver of demand and price direction. The emergence of specialty coffee shops is increasing demand for premium, artisan beans.
Consumption is also changing in different parts of the world, with emerging markets such as in Asia leading demand growth because of rising incomes, changing tastes and growing populations. But the ongoing debate around the health effects of drinking coffee can also affect consumption.
Although Arabica and Robusta beans have different flavours, major changes in the price for one can affect the demand for the other. If Arabica prices soar, demand for Robusta as a substitute could increase in response.
Geopolitics
As more than 90% of coffee is produced in developing countries, social unrest or political instability can disrupt coffee production and market sentiment. Futures prices respond quickly to geopolitical events in major producing nations.
With Russia being the world’s sixth largest coffee consumer, the war in Ukraine and resulting sanctions has had an impact on coffee demand, and is expected to cause a supply surplus in the 2022 to 2023 growing season.
Distribution costs
The cost of transporting coffee around the world is factored into prices. Costs for fuel and shipping determine how expensive it is to distribute coffee. During the Covid-19 pandemic, high freight costs contributed to prices reaching decade highs.
US dollar
Commodity markets including coffee are often priced in US dollars, so the value of the dollar also affects prices. Dollar-denominated commodities become more expensive for buyers with other currencies when the dollar rises, which can weigh on demand. Meanwhile, coffee becomes cheaper when the dollar falls, increasing international demand.
