Last week, a Bloomberg news report said that record Robusta harvests in Vietnam and Brazil, along with a big jump in Indonesia’s coffee output, are going to boost supplies of coffee at a time when demand is under threat from slowing economic growth.
The effect on coffee prices has been visible in 2011, which saw a roller coaster ride. Currently, coffee prices are down to their December 2010 levels.
The average ICO composite price of coffee in December, a price indicator maintained by the International Coffee Organization (ICO), is down 17% from its 2011 high levels.
File photo of coffee beans displayed in a bowl at a Cafe Coffee Day outlet in New Delhi. Bloomberg
December alone has seen the daily price fall 8% till date.
That adds credence to the belief that coffee prices are on a weak footing.
Then, on Friday, the US department of agriculture (USDA) released its revised world coffee consumption and production estimates.
USDA has actually scaled down its estimates of global coffee production in crop year 2011-12, to 133.8 million bags (one bag equals 60kg), or down by about 1% from its earlier estimates reported in June.
Compared with 2010-11, coffee production is expected to be down by 2%.
USDA lowered its estimates after a shortfall in Columbia due to rains.
But there is a divergence in the production estimates for the two key varieties—Robusta and Arabica.
Arabica production is down 7% while Robusta production is estimated to rise 6.6%.
Now, India’s coffee production is dominated by Robusta beans. In 2011-12, it is estimated to account for nearly two-thirds of the total coffee production.
The increase in global production of Robusta—India’s production itself is expected to increase 6.7%—may keep a lid on the prices during the year, despite global coffee output declining.
This would mean that coffee growers such as Tata Coffee Ltd (domestic operations) and CCL Products Ltd will not get as good realizations on coffee as they did earlier in this fiscal.
The ICO’s indicative price average for Robusta in 2011 had risen 20.7% to 122 cents to a pound, from January, but is now trading at about 97.4 cents to a pound.
Coffee growers will still benefit from better output, but a decline in realizations will affect their margins.
On the flip side, marketers such as Nestle India Ltd and Hindustan Lever Ltd will see their procurement costs decline.
That gives them the flexibility to either lower prices or give free volumes while keeping prices constant. This is becoming visible in the market.
The coming quarters should see the branded coffee companies report better margins from selling instant coffee.
Tata Coffee, too, sells branded coffee, and will benefit to that extent. It will benefit more from the lower procurement costs at its overseas subsidiary, Eight O’Clock Coffee, which markets coffee through retail outlets in the US.
Thus, its consolidated performance should reflect the impact of better margins in its overseas operations in the forthcoming quarters.
Graphic by Yogesh Kumar/Mint
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