Coffee prices have risen to a 10-year high, and analysts predict that market tightening will continue until 2023. Coffee contracts for December delivery closed Monday’s trading session at $2.34 a pound.
The New York Intercontinental Exchange reported coffee futures reached $2.46 a pound on Thursday, the highest price since 2011 when the commodity went beyond $3 per pound. Meanwhile, the International Coffee Association’s standard price was $2.07 a pound on Friday, rising by 85% from the previous year.
According to Ole Hansen, head of commodity strategy at Saxo Bank, “a perfect storm of events… to give our beloved bean a boost” over the past year.
Hansen thinks that for future price action, the issue is how much of these trends are possibly longer-lasting. Hansen added that the focus should be on this year’s happenings in Brazil, where temperatures have been at a generational low. Brazil has experienced a very short episode of frost that affected some of the producing areas and a time of drought – all of which has put the 2022 harvest in jeopardy.
Hansen went on to say that the unfavorable weather occurrences will have an impact on coffee later this year and into 2022, and maybe even into early 2023.
In addition to adverse weather, global supply limits have had a significant influence on the coffee industry since farmers and roasters — the entities that refine coffee into the product we drink — are frequently situated in separate countries. Market instability is also being caused by exporting nations such as Ethiopia, which is on the verge of civil conflict, and Vietnam, which is experiencing an increase of Covid-19 cases, which might disrupt coffee production.
Hansen remarked that, for the first time in a long time, the market seems to be starting to show some tightness.
According to Maximillian Copestake, executive director of European coffee sales at Marex, coffee is in a massive pricing competition that is driven mainly by freight dislocations.
On a phone call with CNBC, he said that most of the coffee supply had been concentrated in primary coffee-producing origins for the past five to eight years. As reported, this is Brazil, and one of them is Vietnam.
Copestake went on to say that the market does go crazy when there is damage in one or both of those coffee-producing countries and subsequently tries to encourage other countries to start producing the crop.
According to him, that is the core premise, and the freight interruptions have only been the icing on the cake. He continues to say that freight interruptions have exacerbated what was already a tight balance sheet, which should have played out in higher prices later in the crop.
Copestake observed that coffee output takes approximately two years to respond to a price shift, and this means it can get pretty uncertain with regard to keeping a benchmark.
He mentioned that while we aren’t out of the woods yet, he recommends promoting and selling all available coffee bag stocks in every farmer’s storage to leverage excellent pricing. He also added that as a result, there is an incentive to plant more and also to reduce inventories at origin and transport those stocks to destination.
Copestake went on to say that he anticipates prices to stay high and volatile in the following months, creating great opportunities for launching coffee products. This opens the door for more creative marketing and coffee packaging to help boost coffee sales.