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Wake up and smell the coffee – market may perk up



CNBC

August 14, 2013

The global coffee market has been rather decaffeinated for the past couple of years, with prices falling to less than half their 2011 peak and the bean becoming the worst-performing soft commodity last year.

Yet there are some signs the market is recovering, following action from the Brazilian government last month. The long-term implications of Brazil's move to buy up coffee beans to keep prices reasonable for farmers are yet to emerge, but they have "definitely" had an impact in the short-term, according to Mauricio Galindo, head of operations at the International Coffee Organization (ICO). The price of Arabica coffee on the New York Futures exchange has started ticking up again.

Coffee is historically a crop which sees prices go up one year and down the next, reflecting production in Latin America. This was supposed to be a year where production fell,but the harvest was better than usual.

As the Brazilian real fell, the country's coffee makers exported more of their daily grind,creating a glut in the market and a dramatic fall in prices.

Coffee farmers in Brazil have taken to the streets to burn sacks of coffee beans in anger at the decline in price. Producers had hoped that improvements in technology, making its coffee plantations more productive, would help avoid the swings in price which characterize the market. Yet they reckoned without the impact of a better-than-expected harvest, and the extent to which cheaper Vietnamese coffee has captured emerging markets.

There are two main kinds of coffee beans: cheaper robusta, which is mainly grown in Vietnam and is doing best in emerging markets like Vietnam, Indonesia and China, and pricier arabica, of which Brazil is the biggest producer. Robusta has been much less volatile in terms of pricing in the past few years.

Some of the smaller coffee roasters had become the target of short-sellers, but companies like Green Mountain and Farmer Bros have seen their demand to borrow fall this year.

Starbucks just had the best third quarter in company history. Howard Schultz, CEO, tells CNBC, "Our growth is based on satisfying customers throughout the day. The results we achieved were remarkable."

Investors have been increasing their positions in coffee funds this year to date, Simon Colvin, analyst at Markit, pointed out.

"Consumer sentiment is picking up again, and so have margins," he said.

The big winner from the decline in prices is likely to be behemoth Starbucks, according to Colvin.

Coffee capsules like Nespresso have helped boost sales for Nestle, the world's biggest coffee maker. However, sales growth slowed this year as competition from other capsule makers increased – and Nestle's market share is also threatened by the emergence of Mondelez as a competitor.

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