Coffee prices this year have been influenced by a decline in demand from the food industry during a time around the world anti-Covid-19 social blockade. This market is changing as consumers switch to drinking coffee at home instead of restaurants, and that has affected the demand for some brews.
Coffee prices have fluctuated quite strongly since the beginning of the year – in a range of about 40%. Up to this point, the Covid-19 epidemic is still going on, and the industry as well as investors need to predict what the next market trend will be? What segment in this industry will attract stronger demand from consumers?
Why invest in coffee?
Although coffee is not as popular as other commodities such as crude oil and metals, it is one of the most traded soft commodities in the world. Coffee is in a wide variety of portfolios, from commodities bought to fight inflation to popular goods when the dollar falls. Coffee exports are an industry worth up to 20 billion USD, providing the world 2 billion cups of coffee per day.
Coffee prices are often affected by supply concerns, which can lead to strong fluctuations and create profit opportunities for investors. Coffee is grown in more than 50 countries, but large-scale production is concentrated in only a handful of countries where weather and geopolitical fluctuations affect supply. The coffee market can also be affected by global economic growth, with consumption increasing in some emerging economies in Asia, Africa and Latin America as they develop, and in developed countries when disposable income increases.
However, investors need to be cautious because when the supply is plentiful, the economy declines and the dollar strengthens, the price of coffee will fall.
The reference coffee futures contract for global Arabica is standard Arabica C, listed on the New York Commodity Exchange (NYMEX), owned by the Chicago Commodity Exchange (CME) and the Department. Intercontinental transaction (ICE). Coffee beans account for 75% of global coffee production, mainly grown in Brazil and Colombia, of which Brazil alone accounts for 40% of the total supply. The remaining 25% of coffee is Robusta, produced mainly in Vietnam and Indonesia. The Robusta contract traded on the ICE platform is used as a reference for the global Robusta market.
Arabica is a premium coffee with a milder, sweeter aroma; while Robusta has a bitter taste, the caffeine content is higher. Robusta prices tend to be more volatile, as Robusta is used mainly by large multinational corporations, and mainly blended.
Changes in production lead to fluctuations in coffee prices
The trend of coffee prices decreased from the end of 2016 to 2019 due to production increases exceeding consumption in Brazil and the sharp decline in the Brazilian real against the USD. The time when the price hit the ‘bottom’ was in May 2019, when the Arabica price dropped to 0.87 US cent / lb, from the historic ‘peak’ in 2011 of 3.06 USD / lb.
After Brazil hit record high output in crop year 2018/2019, output declined and supplies tightened. The combination of falling Brazilian output and strengthening Brazilian real changed the trend in this market, causing prices to rise in the second half of 2019. Consumer tastes also changed, cold coffee is becoming increasingly popular, especially in America; Coffee consumption in China has also increased rapidly, where Starbucks opened more than 600 stores in 2019.
Coffee prices began to fall in February 2020, when Covid-19 forced countries to close their markets, starting in Trugn Korea then spreading around the world, reducing the demand for coffee in the shops. Consumers switched to drinking coffee at home, causing demand for varieties to shift from Arabica to Robusta – coffee used as a raw material for instant coffee production.
Arabica prices entered in 2020 at 1.26 USD / lb, dropped to 0.98 USD in February 2020, then increased to 1.3 USD / lb in March 2020 and then fluctuated sharply. turned back to reduce to $ 0.96 in early June 2020.
Arabica prices rose during the summer as countries gradually eased restrictions against Covid-19. But the second wave of plague broke out and brought prices down in the winter. Arabica prices, after falling to a 3-month low on November 3, have reversed and increased by over 10% to $ 1.12 / lb. Brazil’s exports in October 2020 increased by 11.5% year-on-year, accompanied by concerns about typhoon Eta hitting Nicaragua and Honduras in the first week of November, seriously affecting crops. and also transportation.
Robusta coffee prices also increased because rains in Vietnam interrupted the harvest. In the key regions of the Central Highlands, coffee bean prices are currently trading from 33,700 to 34,200 VND / kg, the highest this year. At the port of Ho Chi Minh City, Robusta coffee type 2 exports, the rate of 5% broken black has a price up to 1,541 USD / ton (FOB).
What is the outlook for coffee prices from now to the end of 2020 and 2021?
Coffee investors are keen to know if the recent price increase will sustain in the coming months or not.
Prices of all kinds of goods increased dramatically on 9/11/2020, when it was announced that a vaccine against Covid-19 was very potential with a 90% successful test result. An effective vaccine will help the world economy recover, thereby driving up demand for coffee.
However, analysts forecast that the coffee market will continue to be under pressure as many Government introduced blockade measures again to prevent the second Covid-19 pandemic wave from spreading.
“Demand from coffee shops and other food service activities is still very low as consumers are still drinking coffee at home,” said Jack Scoville, analyst at the research firm Price Futures Group. “The survey results show that consumers at home are consuming blends with more Robusta and less Arabica.” Such trends suggest that Robusta prices in the coming months will be better than Arabica.
Dutch bank ABN Amro analysts also have their own coffee price forecasts: “Dry weather in Brazil is a concern for the coffee market. It is very likely that Brazilian production during the year. crop 2021 will decrease. Consumption of coffee in shops will decline due to the Covid-19. This pressure will continue with new global quarantine measures. Prices will remain relatively weak. “
Amro forecasts an average Arabica price of $ 1.09 / lb in December, down to $ 1.07 in the first quarter of 2021 and an average of $ 1.09 in 2021.
Fitch Solutions forecasts an average Arabica price of $ 1.05 / lb in 2021 and 2022, but will drop to an average of $ 1.10 / lb by 2020. Citibank lowered its Arabica price forecast in the next 3 months. 1.07 USD / lb and remains “stable or decreased due to oversupply in crop year 2020/21 amounted to 4.3 million bags”.
Similarly, technical forecaster WalletInvestor.com predicts that the reference arabica coffee price will drop from $ 1.08 / lb in December 2020 to $ 1 in December 2021.
Reference: Capital, Reuters
