Explained | Why coffee prices are soaring

The global shortage is a blessing for India where FY21 output jumped 12%. India is the world’s seventh-largest coffee producer but not a major consumer, and exporters have better availability of containers compared with Vietnam and South America and are getting good prices (Image: Shutterstock)

Global coffee prices are soaring because of lower availability from the main producing countries, which has created a demand-supply mismatch in the international market for the beverage.

Adverse weather, strict lockdowns because of the COVID-19 pandemic and severe logistical bottlenecks have disrupted the global coffee market and raised prices to multi-year highs for both varieties of coffee — Robusta that has more caffeine and a stronger, bitter taste, as well as the Arabica grade that has a smoother and sweeter taste.

Moneycontrol looks at what is driving the international coffee market and what it means for India.

Sharply rising prices

Robusta coffee futures soared to more than $2,000 per tonne last week, having risen about 50 percent this year; while in July the Arabica grade had risen to the highest since November 2014, making the beverage more costly around the world. Robusta prices had been slightly lower than Arabica for more than a year but last week’s move brought them on par with Arabica.

Brazil ignited the coffee market

Coffee prices started rising because of adverse weather in Brazil, the world’s biggest producer of the bean for the last 150 years. Output in the country is expected to fall to the lowest in nearly two decades.

After erratic rainfall, the Brazilian crop was hit by extremely cold weather, which damages coffee plants. Many coffee plants in Brazil developed spots on their leaves as the cold weather was the worst since 1994.

The coffee crop is even more vulnerable to damage when a cold spell hits the plants that have already been weakened by a drought. The damage is so severe that some plantations in Brazil may need to plant a new crop, which will take years to mature.

Other major producers

Supply from Vietnam, the second-biggest producer, has been disrupted by lockdowns because of rising COVID-19 cases. The government has imposed a lockdown in Ho Chi Minh City, a coffee exporting hub, while movement of the beans from plantations to cities is also affected. As a result, Vietnamese coffee is unable to reach consumers around the world.

The third-largest producer, Colombia, also has problems. Supply was disrupted because of a series of anti-government protests in the country, which raised Colombian prices to a record in May this year and affected supply as well as the market sentiment globally.

Logistics adds to the woes

Like various other commodities and goods, coffee is also suffering from very high freight costs and shortage of containers. The problem is quite severe in South America and is raising the cost of Brazilian and Colombian coffee. There are several cases of vessels not being available despite being booked in advance, which creates sudden supply glitches.

Implications for India

The global shortage is a blessing for India, which is the world’s seventh-largest coffee producer but not a major consumer as the country’s favourite beverage is tea.

India produces mostly the Arabica variety of coffee, 70 percent of which is exported. Exporters are getting good prices and the output in 2020-21 increased by 12 percent, according to data from the Coffee Board.

Indian exporters also have better availability of containers compared with Vietnam and South America. This is because containers coming in with cashew imports are being used to ship out coffee, traders say. Indian coffee imports have increased about 10 percent so far this year.

Outlook

Prices may rise further as concerns about the weather continue to dog the market. Arabica coffee futures rose on August 30 because of forecasts of adverse weather, indicating more stress for beleaguered crops in top supplier Brazil, according to a Bloomberg report. Key producing regions in Brazil are forecast to face adverse weather in the coming weeks, it said. This can further increase global coffee prices.

(The author is an independent journalist)