Coffee brews a better blend
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The Tata Coffee Ltd stock is up by a third since end-May. The reasons for that increase can be found in how coffee prices are moving. The Robusta variety—popular with instant coffee producers—has spiked, with the International Coffee Organisation’s June price average for the variety up by 14% over March. The Arabica variety—popular with the roast and grind crowd—has also risen but a more modest 6%, for Brazilian milds.
What’s brewing? Robusta output is forecast to decline by 8% in 2016-17, according to the US Department of Agriculture’s estimates. It had declined in the previous year too. The crop in Brazil and Vietnam has been affected by bad weather. In contrast, better Arabica crop yields in Brazil may push global output up by 9%. Since Arabica makes up 60% of global output, its increase will still push global output by 1.5%. That should support prices of Robusta while the more expensive variety may face some pressure.
This particular combination suits Tata Coffee quite well. Its plantations in India grow both varieties but more of Robusta; in FY16, it produced 3 tonnes of Robusta for every tonne of Arabica. Higher prices for Robusta mean more revenue per kg it sells. Also, the value-added coffee it sells will earn it more profits, to the extent it uses coffee grown at its plantations.
While the decline in Arabicas will pinch to an extent, it bodes well for Eight O’Clock Coffee Company, its subsidiary which sells branded coffee in the US and uses Arabica blends. Lower prices could boost consumption if the company passes on the benefits (likely due to a competitive market) or boost profitability if it can retain even some of those cost savings. This is an important subsidiary, having earned Rs.1,046 crore in revenue in FY16, compared to Tata Coffee’s figure of Rs.1,765 crore. However, Tata Coffee’s Indian operations contribute more to profits, with standalone net profit accounting for nearly two-thirds of the consolidated figure.
The current forecasts would indicate a firm trend in Robusta prices while Arabica prices trade relatively soft. The tide appears to be favouring Tata Coffee at this point but this could reverse suddenly as well. Changes in crop yields or in the weather outlook or even currency movements could affect coffee prices. Keep a watch, therefore, over news from the major coffee growing countries in the Americas and Asia.