Many of you have probably seen recent headlines indicating the surging prices in the international coffee market. I have even seen over-dramatized headlines painting the picture that we are going to experience a global shortage of coffee! Although I will admit they are fun to read, these articles have a tendency to over-simplify what is actually going on on the ground. I wanted to write a brief summary as to what we are seeing in the global market and how those things are driving some of the recent price action. Additionally, we find ourselves in an interesting period in history where supply chains for virtually every product that you use on a daily basis is facing some sort of disruption. Call me a complete dork, but I think that coffee provides an interesting lens with which we can see what is going on "behind the scenes" in the global economy.
At the end of July, the ICO (International Coffee Organization) composite price spiked at ~$1.52/lb., which is the highest level since November 2014. Much of this price spike can be attributed to the threat of a freeze in the growing regions of Brazil, the world largest coffee exporter. There are several other factors at play which have driven the recent market dynamics: violent protests bottlenecking Colombian exports, strengthening of the US dollar, container freight hitting their highest levels since the beginning of containerized freight, and the restarting of the global economy post-pandemic driving revitalized demand. Below I will touch on a few of these topics with the hopes of helping you understand what is happening.
Weather in Brazil
The situation in Brazil can be characterized as "the wrong moisture and the wrong time." A few weeks ago, Minas Gerais, the principal growing region in Brazil, a frost event occured, which is believed to have caused both short and long term damage to the crop. Additionally, Brazil weather agencies are now indicating soil moisture levels are at ~60% of their normal levels, which will have a negative impact on yields for next years’ crop.
How does this affect you? Well it doesn't affect you directly, if you're a consumer of quality specialty grade coffee. While Brazil is the largest exporter in the world, they actually export very little specialty coffee. There are however, secondary effects. One that we have heard anecdotally from coffee producers in other regions is that while commercial coffee often has a significantly lower price, when there are spikes in the market, it can be attractive to sell their specialty grade coffee to the commercial market due to the ease of the transactions. Therefore, some of your favorite micro-lot producers may be selling their coffee this year to commercial buyers rather than specialty buyers.
Over the past several months, protests against the Duque government tax reform have turned violent. While there is still violence in certain remote areas of the country, most of the roadblocks have ended and coffee is now being exported freely. This caused short-term supply chain bottlenecks out of the 3rd largest exporter, however coffee is now on the move.
Colombian coffee differentials have increased steadily this year, which partially can be attributed to a strengthening USD or weakening Colombian Peso. We are seeing current differentials (the premium paid at origin vs. the ICE futures contract) hovering at around $0.57/lb..
The international container market has been in an extreme log-jam since the restart of both the US and Chinese economies. Part of the problem has been the inability for ports in the US, particularly in California, to keep up with the high loading/unloading rate of Chinese ports. This has caused a situation where it can be very difficult to even find an available container in lesser trafficked routes like LatAm-US. Container freight is currently at all time highs, making it very difficult for lower priced commodity exports to compete with higher valued items. Simply put, someone exporting a container full of high value items is able to pay hefty premiums to essentially jump the line to get on a boat. We have heard booking premiums of up to $25,000 just to load the container! That would equate to an additional $0.63/lb. on coffee being loaded. (We have not heard of these premiums being paid by coffee exporters) Based on conversations with our freight brokers, this situation is not likely to let up until mid-2022 assuming there are no more disruptions to the global economy.
US demand for coffee has kicked into full gear. As cafes and restaurants open their doors again, we are seeing much more demand. During the pandemic, the US food industry saw a high rate of turnover, and there are many new cafes and restaurants opening. Although the statistics are spotty, there is also a noticeable uptick in specialty coffee demand (vs. commercial coffee). US differentials for a washed specialty grade coffee can be seen as high as $2.50/lb..
Each of these topics could be expanded upon, however, the point of this post is to provide quick and digestible insights as to what is going on in the global coffee market. News publications are loving making bold calls for signals of inflation. This is easy because calls of inflation are vague, and often cannot be measured or confirmed. Many public figures, including Starbucks and JM Smucker's, 2 of the worlds largest coffee roasters, have indicated that they have yet to increase consumer pricing however, they may consider doing so in the near future. It is my opinion that it is entirely too early to make a call for a period of runaway inflation that will cause our cups of coffee to skyrocket. In the meantime, we will keep an eye on the global coffee market and you can keep enjoying your cup of coffee!