It is a good time to be a coffee grower but the news may not be good for branded coffee marketers. Coffee prices have been rising globally due to supply-related worries. High food inflation in India will mean consumers will be looking for means to cut corners, and discretionary consumption of items such as coffee may be hit.
The Coffee Board of India has released its post-monsoon estimate of coffee output for fiscal 2011, revising it down by 3% to 299,000 tonnes, compared with the post-blossom estimate. Unseasonal and excess rains in October and November have affected the crop in certain regions. India’s coffee output will still be higher over last year’s post-monsoon estimate, up by 3.2%, but nearly half of initial expectations.
Normally, that should have growers worried, as lower output would translate to lower sales. But higher prices may come to their rescue.
A number of coffee producing and exporting countries, such as Indonesia, Vietnam and Colombia, have seen lower-than-expected output, according to the November market report of the International Coffee Organization (ICO). Brazil has been facing weather-related uncertainties, too, and its output may be down by 23%, according to a Bloomberg report.
Lower opening inventories of coffee and lower-than-expected output have sent prices through the roof. The ICO composite price, as of 22 December, was up by 14% in a month, and compared with June’s average price, was up by nearly 35%. The price increase in the Robusta variety—which accounts for over two-thirds of India’s output—was about 10% and 27% during the same periods respectively. Its rise may not be as spectacular as its more prosperous Arabica sibling, but is enough to ensure that Indian plantation companies make money, despite lower output.
Growers such as Tata Coffee Ltd and CCL Products (India) Ltd should benefit from higher prices. Investors are already factoring in the impact of higher prices. Tata Coffee’s share price reversed its declining trend in December, rising by 23% since 9 December, while CCL has risen by 17% in the same period. Tata Coffee, of course, also retails coffee in the domestic market, apart from being an exporter. Its gains depend on how domestic branded coffee makers react to rising prices.
In the past, when prices shot up sharply, consumers shifted from branded to loose coffee consumption. To prevent that from happening, producers may choose to hold back on price increases.
Still, Tata Coffee would be in a better position compared with Hindustan Unilever Ltd and Nestle India Ltd. The risk to Tata Coffee would be from its US operations, as Eight O’Clock Coffee Co. may find it difficult to sustain growth in a rising price environment. For HUL, coffee is a smaller portion of its beverage portfolio, about 3% of total sales and 20% of beverage sales.
Thus, rising costs will affect beverage margins but the impact will be relatively insignificant at the overall level. The stakes are higher for Nestle, as the beverages segment contributes about 15% to its sales. Both companies are seasoned players, and would have locked into lower prices for their near-term requirements. The increase may have only a limited impact on them in the near term, though costs are likely to begin rising when they are forced to go into the market to buy coffee at higher prices.
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