For the first few months of 2012, coffee prices should not move down until it is certain how the supply gap turns out. While we see the Futures markets softening due to a lot of economic news around the world, it is too soon to expect the softening to be reflected in coffee selling prices. Ingredient costs continue to be high for food companies, consumers, grocers, restaurants — coffee roasters are no exception. Bloomberg News, on December 14, 2011, stated “Arabica coffee demand will exceed supply by 7 million bags this season, equal to a year of Japanese [coffee] consumption.” (Japan is the world’s fourth largest coffee consuming country.)
In 2012, it is safe to anticipate an abundant supply of robusta and lower-grade arabica. The same cannot be said about the higher-quality washed arabica sector. Ongoing supply problems in Colombia and excessive rain in Central America will keep the supply/demand ratio tight and lead to firmer differentials again.
It also serves as a reminder that if anything unusual happens this year that adversely affects the future Brazil crop (frost, drought, etc.), the extremely limited global stocks won’t be able to prevent a price explosion.
Continue reading to see how to best leverage the rebound in coffee sales, demand for quality and the opportunity it provides for profitability improvement.
Coffee stocks and supply revised downward
World output of Arabica coffee will shrink 4.3% to 79.6 million bags in the current crop year, which began in October, according to the London-based International Coffee Organization.
Heavy rains, along with coffee rust (roya) and the coffee berry borer, in Colombia have reduced its annual projections by 2.0 million bags (60 kg bags) to 8.5 million bags for the third consecutive lower production year.
Central America was also hit by heavy rains at the start of its harvest in October, which is expected to clip production in El Salvador and Guatemala.
Brazil (supplier of one-third of the world’s coffee supply) is in an off-year low production cycle, estimated at 49.2 million bags of both arabica and robusta coffee, falling short of recent record crops.
Global coffee consumption is growing, especially in Asian markets, whereas North American consumption is relatively stable.
World green coffee bean ending stocks reduced 2.4 million bags to 24.0 million and remain tight, resulting in a lower surplus. (See chart above for trailing six-year view.)
Coffee differentials tightening and increasing
Currently, differentials at origin have tightened up and recently began increasing, especially following the poor weather conditions and spreading coffee leaf fungus in Colombia.
Consumption growing faster than supply
As the physical supply of arabica coffee tightens around the world, people have also increased coffee consumption, particularly in coffee-producing regions such as Brazil, Southeast Asia and India. This takes coffee supplies out of the market that would normally be available to established roasters.
“We may be approaching a day where top-quality coffee is both rare and expensive,” said Randy Layton, Boyds Coffee Roastmaster. “More countries are developing a new and younger coffee drinking culture. In addition, a number of impacts recently affected the coffee supply: weather, unstable labor, financing options at origin, even pests and plant disease.”
Below is a 35-year graph showing the changes in coffee prices and factors that affect those prices. Graph is courtesy Volcafé-USA.
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