In today's market, a simple cup of joe is becoming increasingly expensive. This is due to the careful considerations of bean counters who are weighing the risks associated with the global coffee supply. Coffee prices have hit a record high in New York, and this is causing concern among consumers and industry players alike. The mounting worries over a global supply crunch have made coffee one of this year's hottest commodities.
Unraveling the Impact of the Global Coffee Supply Crunch on Prices
Coffee Futures: A Surge in Prices
Futures for the arabica variety, which is favored in specialty brews, have seen a significant surge of about 80% this year. This surge is mainly due to crop setbacks in key growers. The arabica futures rose as much as 4.9% on Tuesday, touching the highest in data going back to 1972. This surpasses the peak set in the 1970s when a disastrous so-called Black Frost decimated Brazilian trees. The fears about future supplies in top grower Brazil have grown after a severe drought earlier this year. In addition, there are worries about output in Vietnam, the largest producer of the cheaper robusta bean. Its key coffee belt suffered from dryness during the growing period, and heavy rains arrived at the start of harvest.This rally in coffee futures is likely to further raise costs for roasters and cafes. They may have to pass these increased costs on to consumers. Facing a squeeze, sellers have already raised prices and scrapped discounts to protect their margins. They have also warned that there may be more price hikes to come.
Brazil's Output Prospects: Worsening Conditions
Major trader Volcafe Ltd. has cut its outlook for Brazil's arabica production after a crop tour revealed the severity of an extended drought. Brazil is now seen producing just 34.4 million bags of arabica in the coming season, which is about 11 million bags less than the September estimate. This puts global coffee production on track to fall short of demand by 8.5 million bags in the 2025-26 season, marking an unprecedented fifth year of deficits.The situation in Brazil is particularly concerning as it is one of the major coffee-producing countries. The drought has had a significant impact on the country's coffee output, and it is likely to continue to affect production in the coming years.
Contrasting with Broader Wholesale Food Costs
Record coffee prices are in contrast to broader wholesale food costs, which are well below an all-time high set in early 2022 in the wake of Russia's invasion of Ukraine. However, soft commodities still account for some of the year's best-performing raw materials. Cocoa, for example, has soared and hit a record in April in New York after poor harvests in West Africa fueled a huge global shortage and rattled the market. Orange juice futures are also near the highest ever after droughts and disease hit trees in top producer Brazil. Output in Florida, the main juice-producing state in the US, has also plummeted, with prices supported by hurricane damage as well.This shows that while coffee prices are rising, other food commodities are not following the same trend. It highlights the unique challenges facing the coffee industry and the need for careful management of the global supply chain.
