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.