In 2011, coffee prices saw wild jumps. This was attributed to concerns on output due to unfavourable weather conditions, which were magnified by the financial market as coffee is an actively traded commodity. But high prices normally lead to higher output, in turn putting pressure on prices. This is a familiar story. But what is unusual is that the two grades of coffee—the high priced Arabica and its poorer cousin Robusta—are behaving very differently.
In 2010, Colombian Mild Arabicas started the year with an average of 208 cents per lb in January and ended it at 262 cents per lb, gaining 26%, as per figures maintained by the International Coffee Organisation (ICO). In the same period, Robustas gained by 34%. The bullish trend continued in 2011 till April, with Arabicas rising by 19% over December 2011, and Robustas by 25%.
But the picture has changed since. Now, the May 2012 average of Arabicas shows a decline of 34% over April 2011, but strangely Robustas is down by only 9%. This divergence is unusual, as both grades are known to move in the same direction. And, usually, Arabicas show more strength compared to Robustas. Now, Arabicas are back to levels seen in May 2010, while Robustas are still at levels seen in February 2011.
Reasons for the overall bearishness are a few. High retail coffee prices appear to have hit coffee consumption, especially in the weaker Eurozone. Preliminary estimates show coffee consumption rising by only 1.7% in 2011, compared to 2.6% in 2010, according to the ICO. Higher prices have affected consumption, especially in developed markets. Higher prices may also be seeing consumer preference shift to the cheaper Robustas. If this is correct, it may explain the divergence in price behaviour.
Source: International Coffee Organisation
The ICO’s latest monthly report says it is early to estimate 2012-13 production. The US Department of Agriculture’s Foreign Agricultural Service prepares country-level reports, which provide some indications on what to expect.
The FAS estimates Brazil’s coffee output in 2012-13 (July-June) to increase by 13.6% over the previous year. This is the on-year of Brazil’s biennial Arabica production cycle (which involves a crop holiday every alternate year). Colombia’s coffee output is expected to increase by 5.8% in 2012-13 (Oct-Sep), after lying low for 2 years. India’s output is expected to be lower by 4.7% in 2012-13 (Oct-Sep), while that of Vietnam (a heavyweight in Robustas) is expected to increase by 7%. This would suggest a healthy year for coffee production, based on early estimates.
Coffee prices will be sensitive to the health of the global economy in the longer run, and changes to production estimates in the more immediate future. What does this mean for the coffee market, especially in India? Coffee consumers should benefit from the cooling down of prices. India’s coffee growers should not suffer much, because the cut in Robusta prices—nearly 70% of India’s production—is not severe. Rising production costs and a strong dollar may limit the extent to which market prices decline.
Tata Coffee Ltd is likely to benefit from the situation. Its overseas subsidiary Eight O’Clock Coffee Company, which contributes significantly to its consolidated performance, will benefit from lower procurement prices for Arabicas. Eventually, falling Arabica prices will see consumers shift back, and a combination of higher volumes and lower procurement prices should see the company’s performance improve.