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Business News/ Market / Mark-to-market/  Coffee: grounds for worry
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Coffee: grounds for worry

A continued slide in coffee prices could eat into firms' margins and affect their performance

China’s move to devalue its currency has affected other emerging market currencies, some of whom are major coffee producers, including Brazil’s real, Colombia’s peso and Vietnam’s dong. Photo: BloombergPremium
China’s move to devalue its currency has affected other emerging market currencies, some of whom are major coffee producers, including Brazil’s real, Colombia’s peso and Vietnam’s dong. Photo: Bloomberg

The global sell-off in commodities has not spared coffee. In a week, the International Coffee Organization’s (ICO) composite price indicator has lost 9.4% of its value. Monday alone saw it decline by 2.2%.

China’s move to devalue its currency has affected other emerging market currencies, some of whom are major coffee producers, including Brazil’s real, Colombia’s peso and Vietnam’s dong. Exports from these countries are expected to surge as sellers could earn more in local currency terms.

But it is not just currency; supply is also behind declining prices. A recent market report by ICO said supply concerns over Brazil’s crop have subsided. Total exports from the country in June was 9.7 million bags (1 bag=60kg), 3.3% down over a year ago, but still the second largest level for June.

While Brazil’s exports are at record levels, due to the real’s depreciation, the report says Vietnam recorded significantly lower exports as farmers held back stocks owing to lower prices. But the dong’s recent devaluation, which has sent it down 2.8% this month, gives them more incentive to export, even as more devaluation is expected in the coming months, according to a Bloomberg report.

Back home, the post-blossom estimate for coffee for 2015-16 indicates a healthy growth of 9% in output, but is subject to changes post-monsoon. Exports in calendar 2015 have been flat relative to last year. Since the rupee has been outperforming other emerging market currencies, Indian exporters have been at a disadvantage. So far, this would have been felt more by exporters of the Arabica variety, sold by countries such as Brazil and Colombia. But Vietnam is a major exporter of the Robusta variety, which is also India’s main crop (69% of production).

The dong’s devaluation may put pressure on the prices of Robusta if Vietnam’s coffee exports surge. Higher coffee output should support the plantation business of coffee companies, and the rupee, too, has weakened against the dollar, though not as much as the other emerging market currencies have. These are positive factors, but a continued slide in coffee prices could eat into their margins and affect their performance.

However, the stocks of coffee plantation companies have been doing well in the past one year. The latest reason to buoy them were news reports (that were denied) that the government may allow foreign direct investment in coffee plantations. But the past few trading days have seen deep cuts in values following the worldwide sell-off in equities.

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Published: 27 Aug 2015, 06:59 AM IST
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