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ANALYSIS: When the going gets tough then the coffee gets stronger

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When Covid-19 sank its teeth into the world economy, coffee demand was widely seen as one of the earliest and hardest hit casualties.

 

Yet the Arabica futures’ price is back where it was at the start of this year, at $1.319 per pound, while that of Robusta has even gained a fraction, and is now almost 5% up so far this year.

 

Does this signal over-enthusiastic speculative investment, or a genuine resurgence of demand combined with lowered supply?

 

A bit of both probably. Speculative investors increased their overall long position in arabica futures by 34.44% in the week ending 25 August, to a total net long of 22,218 contracts. And green coffee stocks in US warehouses fell slightly by the end of July but remained above the historically high level of 7m 60-kilo bags.

 

In a world where yields elsewhere are on the floor, the US Federal Reserve indicating that it is taking a relaxed view about inflation, and coffee demand relatively inelastic (a fancy way of saying it’s a cheap addiction) then coffee futures are a good candidate for future gains.

 

Mixed signals

 

Coffee demand has been dented this year, no doubt.

 

The latest estimate by the International Coffee Organization (ICO) says they fell 11% in July year-on-year, to 10.61m 60 kilo bags. Robusta exports were less robust than arabicas - dropping by 16.1% and 7.6% respectively. Which is surprising, given that arabicas are what people tend to drink out-of-home and robustas in-home, via instant coffee blends.

 

While some producers - notably Brazil - are expected to be able to export large volumes for the rest of this year, thanks to bumper harvests during 2019-20 - others, notably Honduras, are struggling. Honduran exports from the 2019-20 harvest could fall by almost 20% year-on-year.

 

The broker Marex Spectron estimates that, of a 67m-bag crop, Brazil will export more than 40m bags and that more than half its 2019-20 has been sold forward. This excellent crop might keep a lid on future price rises.

 

Robusta better placed

 

The arbitrage between the London (robusta) and New York (arabica) markets has slowly been widening in recent days and is now close to a 50% discount in favour of the former. Robusta prices have strongly bounced back, gaining more than 42% since their lowest this year of $1,084 per tonne.

 

The world’s biggest robusta producer, Vietnam, has had good weather and for its 20202-1 harvest is widely expected to gather around 29m 60 kilo bags. For the first seven months of 2020 Vietnam’s robusta exports were 1.1% lower year-on-year. Rising prices encourage Vietnamese coffee farmers and traders to hang onto their product, in expectation of more to come.

 

Coffee demand, and hence prices, are heavily influenced by background macroeconomic conditions.

 

If the widespread speculation that a return to pre-Covid social conditions may not materialise, and that unemployment and a consequent drop in disposable income will be around for a long time turn out to be true, then robusta demand is likely to rise and arabica demand at best stagnate.

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