High Coffee Prices May Not Last Long
Currently, supply disruptions in Vietnam caused by weather challenges are driving the world coffee market.
Your morning coffee may be pinching your wallet but the sweet aroma of rising prices is music to the producers' ears.
Arabica coffee usually enjoys a premium over robusta coffee. The premium is driven by Arabica’s sweet taste and smoothness. However, Arabica’s premium over Robusta is beginning to shrink because of evolving market conditions.
Fundamentals between the two types of coffee are diverging. Arabica's premium dropped to around $660 a tonne last week — the lowest since May 2019.
Going forward, market participants expect that Arabica will face a supply surplus while Robusta risks supply deficit in 2024–25 season. If the deficit materialises, it will be for the fourth successive year in a row. One key reason attributed to the risk associated with Robusta harvest is the concern over El Nino-driven dry conditions in southeast Asia.
Currently, supply disruptions in Vietnam caused by weather challenges are driving the world coffee market. To be sure, Vietnam is the world's largest producer of Robusta. Taking a cue from the world market, from the beginning of this year, Robusta prices in India have moved up between 15% and 25%, even as arabica rates have remained stagnant by and large.
Interestingly, profitability of Robusta coffee is quite attractive because of higher yield and lower cost of production.
However, the current high prices must be seen as a short-term or temporary phenomenon and are unlikely to last for a long time. Already there are signs of consumer resistance to high prices. Importantly, coffee harvest in Brazil will start in May and gather momentum over June. It will have a cooling effect on world coffee prices in the second half of this year.
Indian coffee growers are excited about rising prices. There is belief many growers are holding back the crop in anticipation of even higher rates, but there’s a risk there. When supplies from Brazil materialise, the market is sure to correct. At that point, if Indian growers holding inventory try to liquidate all at once, there could be a sharp price fall.
G Chandrashekhar is a senior journalist and policy commentator specialising in agribusiness and commodity markets. He does not hold any trading positon, nor is this a recommendation to trade.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.
