Coffee prices may move up further but that depends on rainfall in Brazil

Anticipation of an off-year in Brazil in 2019 has raised hopes of better rates

Coffee prices have bottomed out from their 12-year low. Market expects that prices may move up further, but that depends upon the quantum of rainfall in Brazil and how that affects production in the largest coffee producing country.

In September, arabica coffee futures in ICE had fallen to touch 97.3 cents per pound, lowest since July 2006. From 140 cents last year, coffee prices have been on a downward slide due to good crop in three large coffee producing countries – Brazil, Vietnam and Columbia. Expectations of a record crop in Brazil have been particularly weighing down upon prices for some time.

As per the data from International Coffee Organisation (ICO), global production in year 2017-18 was estimated 5.7 per cent higher at 164.81 million bags. Output of arabica coffee increased by 2.2 per cent to 101.82 million bags and robusta grew 11.7 per cent to 62.99 million bags. Compared with an estimated consumption of 162.23 million bags, production exceeded by 2.58 million bags.

Weaker currencies in these large coffee producing countries also added to the woes. Exporters sold off more stocks in the international market for higher returns in local currency. According to ICO, coffee exports touched a new record in 2017-18 at 121.86 million bags.

India too was initially exporting more to make most of the currency weakness. Between January 1 and July 5, the country exported 2,23,514 tonnes of coffee against 2,01,209 tonnes in the same period last year – up by 11 per cent. But by November first week, exports stood at 3,13,617 tonnes against 3,23,240 tonnes. Between January and November last year, it was down 2.9 per cent.

“By the time, the rupee weakened to all-times lows, our inventories had depleted. Our carry forward stocks were small as the production was low last year. In fact, production has been coming down year-after-year,” said Ramesh Rajah, president, Coffee Exporters Association.
From around 120,000 tonnes five years back, arabica coffee production has fallen to below 90,000 tonnes. The robusta coffee too is hit by a bad crop year as the production is expected to be around 200,000 tonnes this year against 240,000 tonnes last year.

“At the current prices it is difficult for the growers to maintain plantations. If arabica parchment is priced at Rs 9,000 per bag, growers can break even. But prices at the farm gate level had fallen below Rs 7,000 per bag in September in line with the international trend,” said Rajah.

However, prices in both international and domestic market have bottomed out recently. The sell-offs in the equity markets turned investor interest towards commodities. Among commodities, coffee was trading at multi-year lows and investors found this as a bargain hunting opportunity.

Further, anticipation of an off-year in Brazil in 2019 also has raised hopes of better prices in the market. Arabica prices are currently trading at 116 cents per pound in ICE and in Indian arabica parchment prices at farm gate level have moved up closer to Rs 8,000 per bag.

Market watchers expect that prices will see some more recovery in the coming months. “It is monsoon season in Brazil. The rainfall will determine how big the crop will be there. Till then, prices can recover towards 120 to 130 cents and if it touches 140 cents, Indian prices also would get closer to Rs 9,000 per bag,” said Rajah.