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Article: COVID-19 leads to firmer coffee prices - for the time being
08 April 2020
Read below an article taken from our FO Licht platform dated
07/04/20.
The coffee market has been defying overall weakness in
commodities recently as arabica coffee futures have risen strongly
in late March and even reached a 2-1/2-month high of 130.65¢/lb on
March 26.
Subsequent technical liquidation and pressure from a drop of the
Brazilian real to a new all-time low against the US dollar of
5.3229 have pushed prices to about 118¢/lb at the time of writing
but this means that prices have still gained about a fifth from
levels just below 1 USD/lb hit in early February. In comparison,
WTI crude oil futures have collapsed from USD50 to USD20 per barrel
during the same period even though they have now recovered somewhat
to about USD27.
Coffee market has strong fundamentals
This has to be seen against the background that, fundamentally,
the coffee market already had some bullish factors in the making
when COVID-19 hit the markets, such as the fact that the world's
largest supplier Brazil is running low on stocks ahead of the new
harvest.
On top of this, there is now increasing worry over potential
disruptions to shipments from some producing countries linked to
the coronavirus pandemic, so roasters have been seeking to secure
supplies and thereby shore up prices.
Among the main concerns are that
- there could be disruptions to port operations affecting coffee
exports
- governments could restrict movement of seasonal workers that
travel to farms.
As far as coffee is concerned, both factors are theoretical in
nature FOR THE TIME BEING. But this does not mean that things will
continue this way going forward. As a result, coffee importers in
some of the largest consuming countries are stockpiling, bringing
forward orders by up to a month to avoid shortages if supply chains
are disrupted by coronavirus lockdowns.
Roasters stock up
Europe and the United States are short tens of thousands of
freight containers, having received only a trickle from China
during its coronavirus shutdown, while shippers are also struggling
with quarantines at ports and crew shortages. Roasters and traders
are therefore stocking up because they anticipate supply
disruption.
The global pandemic has prompted governments around the world to
impose severe restrictions on movement in a bid to stem the spread
of the virus. Supply chains are backing up as air freight capacity
plunges and companies struggle to find enough truck drivers and
shipping crews.
Growers in major exporters Brazil and Colombia, among other
countries, have therefore seen prices rise. While Colombia is
currently between harvests, most exporters that still have stocks
in the country have temporarily cut operational capacity. However,
roasters are acting to speed up deliveries from other origins as
well, such as Central America. This has contributed to strong
differentials for mild arabica coffees in the physical market.
"We had requests from buyers in all major countries, US, Japan,
Germany," said the head of one of the largest coffee exporters in
Brazil. "Basically all the largest roasters in the world. They want
to have the beans there quicker, just in case." Prices in Brazil
are close to record levels in local terms as well, nearing BRL550
per 60-kg bag. Farmers there tend to sell when prices go above
BRL500. Coffee exporters association Cecafe said shipments are
normal for now, but it added that shipping lines have advised that
container shortages might occur in the coming months, when Brazil
could harvest its biggest crop ever. Meanwhile, a threatened vote
over a strike by on-demand port workers in Santos, the largest port
in Brazil, was called off two weeks ago.
Adding to roasters' concerns are reports that the virus could
cause labour shortages that would hamper coffee harvesting in key
regions such as Central and South America, where many coffee farms
are yet to be mechanised.
"The (mitaca) harvest will start at the end of April, beginning
of May, and what we have to be prepared for is the high probability
that this confinement is extended beyond the 13th," said Roberto
Velez, the head of Colombia's growers' federation. The Andean
country started a 19-day national quarantine last week. Though
farmers and their employers are exempt from quarantine measures,
moving and housing some 150,000 workers in sanitary conditions will
be difficult. So will ensuring beans are being processed and
shipped, he added. "We have maybe one of the best prices in
history," said Velez. "But with that price we're facing logistical
problems, coronavirus, fear."
Vietnam and Central America are in the
off-season
As far as the restrictions to the movement of seasonal workers
are concerned, Vietnam and Central America are currently in the
off-season and the next harvest is still several months away, while
Brazil's (arabica) harvest that will get underway in coming weeks
is not entirely, but to a large degree mechanized. In theory, this
should temper fears to a certain degree, but market participants
are not always paying attention to detail.
Coffee trading in Vietnam has been frozen last week as it began
15 days of social distancing from Wednesday to curb community
transmission of the coronavirus. The Vietnamese government has told
residents to stay at home, only going out to buy food or in
emergency cases for two weeks from April 1. Trading activities,
therefore, have been halted, traders said. "There will be no new
deals struck in the next two weeks, at least. I don't know when
things can be back to normal, maybe months," said a trader based in
the Central Highlands, Vietnam's largest coffee-growing area.
"Beans shipments will also be disrupted as very few workers are at
the port right now."
On the other hand, coffee is a vital foreign exchange earner for
many producing countries, so it can be expected that measures will
be put in place to guarantee shipments and minimize shipping
disruptions.
Global demand to be adversely affected
As far as demand is concerned, it is clear that coffee
consumption of the habitual coffee drinker who needs a cup in the
morning to get going will continue as before. However, there is
also the occasional coffee drinker who only consumes an espresso
after a business lunch or dining out, or the guys who meet in a
coffee shop in Delhi to socialize and have a cup of coffee while
hanging around together. Such consumption of coffee as a social
beverage will surely be affected during times of social distancing,
not least because the Starbucks' and Costa Coffee's of this world
have been forced to close their shops in many countries.
That said, the coffee market has mainly reacted to supply side
concerns so far and is probably underestimating demand losses. This
will probably come into focus later on and so the further upside
potential for coffee prices should be limited.