Coffee is the most expensive in 13 years. Still a necessity or already a luxury?

Coffee is a necessity for most people worldwide. In Italy, the price of this beverage is even regulated, partly due to the influx of tourists unfamiliar with the appropriate cost of an average espresso. However, looking at coffee price charts, one might get the impression that coffee could soon become a luxury item. Will coffee follow the path of cocoa, which reached absolute record prices just a few months ago? Will we feel this in our wallets, despite the fact that the price of the final product doesn't solely depend on the cost of the raw material?

Is There a Global Coffee Shortage? 

Brazil undoubtedly remains the world's largest coffee producer, renowned for its Arabica production in the Minas Gerais region and Robusta in Espirito Santo. Brazil ranks first in overall coffee production and Arabica specifically, and second in Robusta production. Vietnam leads in Robusta production, primarily used for instant coffee. Significant challenges in Robusta production in recent years have driven its price to historic highs. Is a similar situation unfolding for Arabica?

Brazil is expected to match its previous production record in the 2024/2025 season. However, concerns about potential revisions to these forecasts are pushing prices to their highest levels since 2011. Source: Bloomberg Finance LP, XTB

Arabica production is anticipated to reach nearly 100 million 60kg bags, a significant rebound compared to the previous three seasons. Simultaneously, Robusta production is expected to recover to 76,000 bags. This would result in a total production of about 176 million bags, equalling the record set in the 2020/2021 season. Consumption is projected to reach a record of nearly 171 million bags, slightly below production levels. However, it's crucial to note that coffee stocks have been depleted to their lowest levels since 2001, with ICE exchange stocks falling to their lowest point since 1999 at the turn of 2023/2024.

The fact that coffee stocks cannot be held indefinitely due to flavor degradation is a critical consideration. Furthermore, recent adverse weather events have compromised bean quality. The market is now witnessing a robust demand for high-grade coffee, primarily sourced from South America and certain African countries. Many plantations in these regions were abandoned in the wake of a significant price decline below 100 cents per pound several years ago (low consumption during the pandemic). The current price of over 260 cents per pound underscores the market's recovery and the impact of supply-demand dynamics on coffee prices.

An oversupply is expected this season, though adverse weather could significantly impact harvests in Brazil and Vietnam. Source: Bloomberg Finance LP, XTB.

ICE inventories have recovered somewhat but remain historically low, below levels from 2011 when prices achieved all-time highs above 300 cents per pound.. Source: Bloomberg Finance LP, XTB.

Why Are Coffee Prices Rising? 

Weather plays a crucial role in coffee price increases. While demand for coffee grows moderately year-on-year, adverse weather conditions can reduce annual production by 10-20%. A similar situation led to a several hundred percent increase in cocoa prices in recent months. Currently, the price of one tonne of coffee exceeds $5,000, while cocoa reached nearly $12,000 at its peak.

The current price surge is primarily linked to concerns about future production. La Niña, one of the world's strongest weather phenomena, is causing droughts in Brazil. The country is currently experiencing its worst droughts in years, potentially limiting Arabica production in the 2024/2025 season, which could result in a deficit instead of the expected surplus. Moreover, Typhoon Yagi in Vietnam has destroyed many trees, and expected rains in the coming months due to La Niña could lead to numerous diseases affecting coffee trees.

Furthermore, regulations are also crucial for the future price of coffee. Producers are increasing their purchases ahead of new regulations. New European Union regulations, set to come into force at the end of the year, will prohibit the use of goods produced recently in areas where deforestation has occurred. This is causing traders and producers to buy coffee now, as after the regulations come into force, they will need to prove that the coffee they purchase does not come from areas where forests have been cleared. It is also worth noting that the rise in prices on European markets is also linked to the partial blockade of the Suez Canal. Purchasing coffee from Asia or certain African countries means that coffee has to travel a much longer distance to Europe.

How Does the Increase in Coffee Bean Prices Affect Cup Prices in Cafes? 

Until recently, it was estimated that the cost of coffee in a café cup was merely 1-2%. With current coffee prices, the cost share of the raw material itself is beginning to increase. Considering the standard price of espresso in Italy at 1 euro, the cost of coffee used at exchange prices is about 5 euro cents. However, the retail price of coffee is at least 2-3 times higher, considering products from the most popular coffee producers in Italy. This brings the cost of coffee used for espresso to 10 to 15 euro cents, constituting 10-15% of the final product cost.

Is Coffee Headed for a Cocoa-like Scenario? 

Arabica prices have already risen by about 40% this year, while Robusta prices have surged over 90%. Cocoa prices were up by more than 175% in April at one point, though this increase has since been reduced to 80%, considering the rolling of futures contracts. At present, it's difficult to determine if we're facing a scenario similar to the cocoa market. Recent years have seen surplus rather than deficit in the market, indicating that there is still plenty of coffee worldwide. On the other hand, demand growth is virtually uninterrupted, and two or three challenging production years could lead to a situation where stocks become irreparable. They already remain at extremely low levels.

Cocoa, Robusta and Arabica price performance from the beginning of 2024. Source: Bloomberg Finance LP, XTB

While a partial realization of the cocoa market scenario cannot be ruled out, speculative funds maintain a very large number of long positions on coffee futures contracts. The number of net positions was recently at an all-time high. Funds continue to reduce short positions, though they are also decreasing slightly the number of long positions. A very similar situation occurred in the cocoa market, looking from the perspective of 2023 and 2024. Theoretically, such a large number of net positions suggests possible price exhaustion, but the realization of the worst-case weather scenario in the form of a significant reduction in the forecasted position may cause funds to maintain their positions for many months. This, in turn, could lead to price increases to levels of 300 cents per pound of Arabica coffee, which are historical peaks reached in 2011.

Funds hold a large number of net long position on coffee futures. Source: Bloomberg Finance LP, XTB

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