Coffee stocks were in good cheer on Monday, with shares such as Tata Coffee Ltd up by 4% and CCL Products (India) Ltd, a coffee exporter, up by 4.7%.

The announcement last Friday about coffee exports rising 29% from a year ago in July may be one of the reasons. Rising exports because of a better output would result in higher sales growth.

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The Coffee Board of India’s latest data shows that coffee exports rose 35% between 1 January and 19 August. Coffee companies have also gained because of better realizations, which have risen by about 38% on an average during the same period. Coffee prices have risen sharply in international markets, which has benefited Indian growers as well, compensating for a stronger rupee, which would have otherwise hurt exporters.

The trend of rising prices tripped in July, however. The International Coffee Organization’s (ICO) composite indicator price ended July at a level of $1.99 (Rs 91.34 today) per pound (453.59g), down 10% from the month’s starting level. After falling a little more in August, it rose sharply last week, and has come back to its early-July levels of $2.2 per pound. The sharp rise in prices, however, makes them vulnerable to a fall as well. ICO’s July market report says that coffee production in the crop year 2011-12 is expected to be about 130 million 60kg bags, down by 2.4% over the previous year. Production was expected to be lower because it is an off-year for Brazil’s Arabica grade crop. But the fall was lower than what was seen in previous off-years, ICO said.

What does this mean for Indian companies? India’s coffee output is expected to rise 6.7% in 2011-12, based on the Coffee Board’s current estimates. Coffee prices are up sharply from a year ago, notwithstanding the current volatility. That will ensure that growers benefit from a higher output and better price realizations. This should benefit the plantation operations of companies such as Tata Coffee and CCL Products.

For coffee processors such as Hindustan Unilever Ltd and Nestle India Ltd, they would be happier if prices decline. Tata Coffee’s domestic operations may benefit from higher output and prices, but its US subsidiary Eight O’Clock Coffee’s procurement costs will go up. Coffee processors have been raising prices to recover higher costs, but they run the risk of affecting demand.

The past few months had held out hope for them that prices may cool down, but the price rise in the past week has seen those hopes get dashed for now. The dice seems loaded in favour of the plantation firms, as of now.

Graphics by Ahmed Raza Khan/Mint

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