The price increase of coffee beans will be filtered to your morning brew

The surge in green coffee prices may soon begin to seep into the costs consumers pay for daily caffeine repair, which is the latest sign of how the commodity market is affecting the broader global economy.

The price of coffee beans on the international market has soared because the crops of Brazil, the largest producer, have been affected. The worst drought In the past century, the coffee market has experienced a supply shortage for the first time in four years. Colombian anti-government protest Exports were stopped earlier this year, which further pushed up the market.

In early June, the benchmark futures price of New York’s high-end coffee beans Arabica hit a four-and-a-half-year high of nearly $1.70 per pound, an increase of nearly 70% from the same period last year. Since then, prices have fallen to around US$1.50 per pound-still a significant increase compared to 2020.

The devastating drought “is really right [coffee] This year’s harvest,” said Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Other commodities such as iron ore, corn, and oil have all risen sharply this year, and economists say that as producers increase the prices they charge consumers, this situation is permeating the entire economy.

Roasters and coffee buyers often sign forward contracts with suppliers, which protects them from price fluctuations for about three to nine months. Due to the lockdown, the weakened demand for coffee in cafes and restaurants also means that they may still have some inventory on hand.

However, analysts said that when these price agreements are over and the economy opens up, many roasters hope to sign new purchase agreements with sharply increased coffee prices, which may then be passed on to customers in supermarkets or coffee shops.

“We are still shipping the coffee under the previous contract. Stephen Hurst, founder of Mercanta, who trades specialty coffee beans for high-end roasters, said that the next batch of deliveries will start to become more expensive. “From now to the end of the year, Wholesale and retail prices will start to react,” he added.

Jefferies analyst Martin Deboo said that European retail coffee prices have remained stable in the first half of this year, indicating that roasters are still covered by forward price contracts with their suppliers.

But he said that prices may start to rise in the next few months: “As we enter the summer, people’s quilts will start to run out.”

There are some signs that higher prices are beginning to affect consumers. German retailer Tchibo, Announce It will increase the price by 50 cents to 1 Euro per pound from this month, and JM Smucker, the American food company behind Folgers and Dunkin’ coffee brands, Say It plans to increase prices in various categories, including coffee.

The supply and demand gap between Arabica and Robusta (million bags of 60 kg) histogram shows that this year's world coffee production is expected to exceed demand

For coffee shops, in addition to rising wages and other costs, the price of coffee will continue to rise.However, the cost of coffee accounts for a small part For cappuccinos or lattes sold in cafes, rent and labor usually account for more than half of the cost.

Some roasters and coffee retailers may wait to see how the economic recovery develops and how consumer demand recovers before taking action. Although the demand for home coffee surged during the lockdown, it caused a significant drop in sales of restaurants and cafes, especially those that rely on office workers.

Nestlé’s premium coffee division, Nespresso, said that in the United States, it is taking a wait-and-see attitude to see how long the high prices in the coffee bean market can last.

On the supply side, although Brazil’s current harvest is expected to be poor, the country’s record harvest last season means that there are still stocks in the warehouses of growers and exporters, Rabobank analyst Carlos Mela said, adding that :in Brazil. “

However, huge logistics bottlenecks caused by transportation problems have led growers and exporters to insist on inventory. According to coffee traders, the shortage of containers and ships has led to a backlog of goods and other goods around the world. For example, the shipping time that usually takes four to six weeks has doubled.

“It gives me a headache,” Mela said. He added that there is a large amount of coffee waiting to be shipped from the producing countries, and the protests earlier this year interrupted coffee circulation in these countries.

For example, in Colombia, production is not expected to be disrupted by Covid-19, but due to domestic and international logistics issues, export flows “it will take at least two months to return to normal,” said Roberto Velez, chief executive of the Colombian Coffee Growers Association. official.

After the coronavirus crisis, uncertainty also lingers in consumers’ buying habits. Commodity broker Marex predicts that coffee consumption will rebound after the pandemic this year, “but it will not return to the pre-pandemic trajectory.” “Demand is a big question mark. It’s not as strong as some people think. It’s really complicated,” Mercanta’s Hurst said.

The histogram of managed currency net positions ('000 outstanding contracts) shows that hedge funds are racing to enter Arabica futures

At the same time, traders are also paying close attention to the actions of hedge funds, which flooded into the Arabica futures market, exacerbating price increases. Although their positions have declined since then, data from the Commodity Futures Trading Commission showed that financial speculators accumulated a large net long position in early June — betting that prices will rise — equivalent to Colombia’s annual output.

Marex’s Maximillian Copestake said: “Some of the drama we see in price changes must be attributed to the huge capital inflows we have seen from non-physical participants.”

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