Soaring Coffee Prices Foretell a Financial Grind

The coffee market has experienced a significant downturn, with Robusta bean prices remaining near record highs. Rising demand and climate-related effects are causing trouble for the $200 billion coffee industry. Java demand is increasing internationally as higher incomes attract new drinkers. Farmers cultivate two varieties: Arabica, which is more popular, expensive, and finicky, and Robusta beans, which are hardier but generally regarded as less tasty. Vietnam produces about 40% of the world’s robusta, and a drought is hitting hard. Coffee trader Volcafe estimates that Vietnam could harvest its smallest crop in 13 years, leading to a shortfall of 4.6 million 60-kilogram bags. September robusta contracts nearly hit $5,000 per metric ton in early July before coming down to about $4,300 per ton on hopes for a good Brazilian crop. Arabica prices hit their highest level in a decade earlier this year.

Under basic economic theory, shortfalls encourage more production, and big trading houses are investing in new plantations. Smaller growers respond better to price signals than cocoa, as there’s less government interference and co-ops have good links to exporters. A glut might even develop, as it can take four years for coffee plants to reach maturity. Climate change looms large, with roughly half the land best suited to produce arabica won’t qualify as such by 2050. The World Coffee Research industry trade group predicts that in less than two decades, demand will outstrip supply by 35 million bags, or almost half of current production.

Read More @ Reuters