Global coffee shortage looms

Price swings for arabica coffee are the biggest in nearly two decades with traders nervously tracking the approach of a cold wave that’s threatening global supplies.

Futures for the high-end beans have surged 56% this year, making it one of the best performers among commodities.

“The market has to be on edge,” said Nick Gentile, managing partner for NickJen Capital Management in New York. “You can’t be short here.”

Temperatures will begin to descend in the next 24 hours in southern Brazil, with the highest risk of frost coming between Thursday and Friday morning, according to Maxar Technologies Inc. Coffee and cane areas of Parana are especially vulnerable, with temperatures dropping to about 27 degrees Fahrenheit. The chill will last a few hours, said senior meteorologist Donald Keeney.

Top-growing coffee region South Minas Gerais may get readings of around 31 degrees Fahrenheit, enough to cause damage, Keeney said. Temperatures will warm from Saturday, with no chill threat next week.

Brazil’s arabica crops alternate between a high-yielding crop and a low one each year. The most recent frosts are curbing the outlook for 2022, a high-yielding year, when the nation typically accounts for nearly half of global supplies. Minas Gerais grows nearly 70% of that.

While the outlook is dire, prices are swinging because another frost isn’t set in stone, and traders are being influenced by other factors, like a recent margin call on the ICE Futures U.S. exchange. If the frost doesn’t materialize, the market could go into a temporary free-fall, said Gentile. The higher margin requirements also probably led some traders to pare bullish positions in order to avoid paying up to maintain them.

Rabobank International analyst Guilherme Morya said the market may be overbought. The frost could touch areas that were already destroyed during the last two, lessening the blow.

The surges are adding to concerns about food inflation at a time when global hunger is on the rise. Still, changes in wholesale prices often take time to reach consumers, with major companies mitigating the impact of price volatility by hedging their needs. Starbucks Corp. said in a call with analysts Tuesday that it currently has 14 months of supplies covered.

Arabica-coffee futures for September delivery slipped as much as 3.3% and rose as much as 1.8%. It settled down 0.6% at $2.0045 a pound. The 10-day historical volatility is at the highest since 2002.

The new frost could bring more panic buying, even to the point of breaching May 1997’s historic high of $3.18, IHS Markit said in a report. However, any extreme moves would be short-lived.

The supply headwinds are coming amid a fast growing market that could grow to “well over $400 billion” globally in three years, which is a compound annual growth rate of about 9%, Starbucks said Tuesday.

In other commodities, raw sugar for October delivery climbed 1.5% to settle at the priciest since March 2017. U.S. sugar futures for the same type of sweetener also surged, reaching the highest since 2011.

Brazil was one of the beneficiaries of a recent import-quota reallocation in Washington involving sugar after other supplying nations were unable to deliver on their portions. The U.S.’s move came amid sliding domestic production prospects, global supply disruptions caused by Covid-19 and surging freight costs.

Global coffee consumers seeking more supplies to fill the void left by the devastating frost in Brazil won’t get much relief from Vietnam.

Shipments from the country, the biggest robusta coffee grower, are declining because of depleted farmer inventories, a worsening Covid-19 outbreak and a severe container shortage. Exports are likely to continue dropping through September, according to top shippers Intimex Group and Simexco Daklak.

“Farmers say they have run out of beans and so can’t benefit from this surge in prices,” said Do Ha Nam, chairman of No. 1 shipper Intimex Group. “We have bought no beans and sold no beans for more than a month.”

Prices of the milder tasting arabica variety traded in New York rocketed to the highest since 2014 this week after frigid weather destroyed trees in Brazil. That helped lift London prices of the more bitter robusta to the strongest since 2017. Arabica is set to increase 25% this month and robusta to rise about 13%.

“The price rally has not benefited exporters much,” said Phan Hung Anh, chief executive of Quang Minh Coffee Trading JSC in the southern province of Binh Duong. “Surging shipping costs have discouraged importers from purchasing beans in Vietnam. We have no new contracts to buy beans from farmers.”

Sending a container from Vietnam to Europe costs as much as $10,000, six to seven times more than a year ago, according to Anh, who sees his company’s overseas shipments this year shrinking at least 20% from 50,000 tons in 2020.

The country’s exporters haven’t been able to gain much from the jump in the market because stockpiles in their Ho Chi Minh City-area warehouses have been priced already, according to a survey of traders. “We have sufficient beans to fulfill our commitments through the end of the season,” said Le Tien Hung, chairman of the second-biggest shipper Simexco Daklak.

Shippers are worried that the logistics pain may persist through the end of this year when the new harvest rolls in and exports normally rise. An explosive new surge in coronavirus cases is another concern.

Stay-Home Orders

The tally in five provinces of the Central Highlands, a key coffee-growing region, jumped to almost 300 as of Wednesday morning from only a few before last week, according to the health ministry. The capital city of Buon Ma Thuot and a district have been under a stay-home order since Saturday.

Stay-home orders may be extended to other coffee areas in Dak Lak, which grows about a third of the country’s coffee, said Trinh Duc Minh, chairman of Buon Ma Thuot Coffee Association. Minh is worried infections may increase as thousands of workers from southern Vietnam, the virus epicenter, flock home to the Central Highlands to shelter from the delta variant.

Harvesting may slow if the virus stays around until the harvest peaks in November, said Simexco’s Hung, who sees a smaller crop because of lower rainfall and a lack of investment. While most traders said it’s too early for a prediction, five of the 11 surveyed expect a good crop, with two seeing a rise of 6-10% from the previous year’s 1.7 million tons. Exports through July this year are running 9% below a year earlier, according to the statistics office.

Now read: Get ready for coffeeless coffee

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Global coffee shortage looms