Global Coffee Price: Expected Weak Production in Brazil and Indonesia
Sentiments on the global coffee market have turned around completely in 2014 as severe drought in Brazil in combination with high rainfall in Indonesia are expected to result in weak harvests, thereby reducing global coffee production and stockpiles, causing a significant price increase since mid January 2014. Both countries are vital for global coffee production. Brazil accounts for about half of the world's total arabica production, while Indonesia is a significant robusta-type producer.
In previous years, solid coffee production placed downward pressure on international coffee prices. Due to enhanced agricultural techniques and greater use of fertilizers by Brazilian farmers, arabica bean production had been sound, even in years of unconducive weather, and caused less volatility in terms of global coffee output. Previously, due to weather-related factors, the coffee production could slip or increase by 20 percent from one year to another. However, improved farming techniques in Brazil managed to reduce this volatility from 20 percent to less than five percent, particularly due to improved production rates during the weak years. As such, increased coffee stockpiles led to a 60 percent decline of global coffee prices since early 2011.
However, since October 2013, market sentiments have changed dramatically due to weather related factors. A large portion of the Brazilian coffee harvest is expected to fail and the prognosis for next year's harvest is also not good as coffee plants have developed less branches this year. Meanwhile, the arabica beans cannot be replaced by Indonesia's robusta production as production in Indonesia is expected to be weak as well.
Hedge-funds and other market participants have been speculating on a prolonged rally of coffee prices, thus exacerbating upward price pressures. As a result, the global coffee price has increased 70 percent since mid-January 2014. This rally is expected to continue in the weeks ahead due to expected continued drought in Brazil. For the long term, however, the high coffee price cannot stand, particularly if the government of Brazil, which bought enormous quantities of coffee to stabilize the coffee price in previous years of solid production, decides to sell part of its coffee stockpiles.
Further Reading:
• Analysis of Coffee in Indonesia
• Commodities of Indonesia
• Concern about El Niño and Ukraine Tensions Impact on Commodities