Coffee Price Climb is Multifaceted Suggesting Current Levels are Here to Stay

Coffee futures soared to reach almost their maximum in ten years. Crop failure in Brazil, drought in Ethiopia, container crisis and other logistics issues caused supply disruptions. The market expects a shortage of Arabica until 2023. Coffee is one of the most actively traded commodities in the world. The most highly acclaimed brand is certainly Arabica, which price increased by about 80% this year. The front-month U.S. Coffee C Futures are now $231.33 per thousand pounds against around $200 per thousand pounds in the middle of September. March arabica coffee (KCH2) on Thursday closed -2.35 (-1.01%), and Jan ICE Robusta coffee (RMF22) closed +16 (+0.65%).

The coffee market has been stormy throughout the year – prices have been soaring since April. In eight months, the price of coffee futures rose from $1.30 per pound (0.45 kg) to $2.50 per pound – and reached a ten-year high in December. Since then, they have somewhat retreated, but are still close to their peaks.

The main reason is the problems faced by key exporters. For example, as was mentioned above, Brazil (where more than 30% of all coffee in the world is grown, mainly Arabica) faced a record crop failure. In May, the worst drought in a century began, and coffee plantations broadly degraded. Conversely, in July, abnormally cold weather further undermined the surviving coffee plantings, which began to quickly freeze.

Plantations in the two main "coffee states" of Brazil – Minas Gerais and São Paulo, where, in addition to Arabica, are grown, and its cheaper variety – Robusta, were especially affected. The coffee harvest in Brazil fell by 30-35% by the end of 2021.

In Colombia, rainfalls also ruined part of the crop, while another important coffee grower, Ethiopia, is on the verge of a civil war, which is fraught with further delivery shortages. Vietnam is hit by a new coronavirus outbreak and tough quarantine restrictions hit coffee exports. In addition, because of the Covid, there are difficulties in hiring harvest collectors.

For example, Costa Rica, which has a relatively high standard of living, hired seasonal pickers from neighboring Nicaragua in the north and Panama in the South. However, Covid restrictions significantly limited the entry of seasonal workers.

All this was superimposed on the above-mentioned logistics crisis. The cost of sea freight has skyrocketed for the year, in order of multitude, from 2X to 8X. Soft commodity analysts suggest the reason is the increased demand for wide variety of merchandise is the rise in fuel prices, the redistribution of cargo volumes between different regions and the resulting global trade imbalance.

The sea containers themselves have been facing a critical shortage. Also, there is a stable shortage of dockworkers and loaders in ports. As a result, it takes a long time to unload ships, and the bottleneck effect has been accumulating. The memorable accident of the container ship Ever Given, which got jammed earlier in the year in the Suez Canal, added to growing anxiety, permanently disrupting supply chains around the world. To be fair, it's not just coffee that suffers from supply disruptions. 90% of consumer goods are transported by sea in containers, each containing 20-30 tons of cargo.

Disruptions have led suppliers to build up coffee inventories, which further put pressure on current prices. Amid problems with delivery and growing demand, companies and traders are seeking to restrict supplies. Traders increasingly use futures, enabling them to secure delivery at set prices avoiding the turmoil on the physical market. This depletion of stocks “is a very clear signal to the market that there is still an acute shortage of coffee – especially when it comes to Arabica, the most expensive and highly acclaimed brand, which accounts for about 75% of coffee production in the world.

The Robusta variety, also traded on the commodity exchanges – has a stronger and more bitter taste – grown exclusively in the Eastern Hemisphere, mainly in Africa, Indonesia and Vietnam. It is almost four times cheaper than Arabica.

Due to the precarious market situation, retail coffee has already seen continuing rise in price tags. Thus, the average cost of instant coffee for the year increased by almost 30%, while the average cost of ground coffee increased by almost 25% over the year. Furthermore, the price of coffee beans increased by 18.5%, and for capsule coffee – by a whopping 39%.

A new round of rising retail coffee prices will likely occur as soon as Q1 2022 – and expected to add another 15–25%. Fears abound that against the backdrop of high prices and logistics issues, manufacturers would begin to replace Arabica with cheaper Robusta.