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Falling arabica coffee prices could boost demand from coffee blenders in emerging markets

16 November 2013

In September 2013, the commodity website Agrimoney.com reported that arabica coffee futures “[continued] to set four-year lows”, with the best December contract dropping to “115.25 cents a pound”. This follows record production in an “off-year” for coffee production in Brazil. The continued weakness in the value of the Brazilian real is serving to further depress arabica coffee prices, since it “increases the incentive for Brazilian farmers to market their crop overseas”.

According to the reports, it is projected that low arabica coffee prices will see coffee buyers begin to switch back to arabica beans in 2013–14. This could boost arabica demand by up to 2 million bags, according to Marex Spectron, the world's largest privately owned brokers of financial products in the commodities sector.

Recently some types of arabica coffee bean have been trading at the same as or sometimes lower than the robusta variety Conilon. This is prompting a trend back to arabica beans in developing country markets. However, the larger multinational coffee blenders serving Western markets are reluctant to alter their blends and hence risk “hard-won consumer loyalty”.

As a consequence of the surplus of arabica coffee beans in 2012–13 (projected by Marex Spectron at some 7.25 million bags), the boost to demand prompted by some blenders switching back to arabica is not expected to have a serious impact on prices. According to Marex Spectron, there may be some short-term price gains for arabica coffee, but “the longer-term trend is still down.” A record Vietnamese robusta coffee bean crop of up to 30 million bags could also exert a downward pressure on robusta coffee prices, particularly given the likely switch by some processors.

Some quality-differentiated coffees performed better than global price developments would suggest. Reuters reported that Kenyan farmers obtained prices 15% higher prices for AA-grade coffee in mid September compared to the beginning of the month, although the volume of sales was down. Prices for Grade AB meanwhile reached “$257–$142 per bag, compared with $234–$96 [the previous] week”, an increase of between 10 and 48%. This needs to be seen in a context where “AA-grade coffee was selling at more than $500 a bag in late March and the start of April.” This has led to a reduction in projected Kenyan “coffee production and export earnings projections for the 2012/13 coffee year”. 

Editorial comment

With a record robusta crop imminent in Vietnam, coffee prices by 21 October 2013 had fallen to US$1.58 per kg (US$1,580/tonne), their lowest since November 2010. On Liffe Futures, January 2014 robusta coffee prices dropped to US$1,582/tonne, the lowest since September 2010. The delivery of the Vietnamese harvest is set to accelerate in November, yielding a projected 10% increase over the 2012/13 crop year, at close to 28 million 60-kg bags. This is likely to exert further price pressure, with prices already having fallen from a high of 106.26 cents/lb in March 2013 (approx. US$2,342/tonne) to an ICO indicator price of 87.78 cents in September (approx. US$1,935).

In this context, the prospect of large international coffee roasters returning to the use of more arabica in their blends is diminishing. Any shift which does take place will largely be to the cheaper arabica varieties such as Brazilian Naturals. According to the ICO, the price differential between a Brazilian Natural and a robusta fell from 45.48 cents/lb at the start of 2013 to 24.87 in September 2013, a 45% narrowing in the price gap. For other coffees, the gap narrowed by between 23 and 27% (Colombian Mild and Other Mild Arabica respectively).

Retail coffee sales in China increased by more than 90% between 2007 and 2012, with further expansion likely to lead to pricing becoming an increasingly important concern. Starbucks, which expects to see China emerge as its second biggest market after the USA by 2014, was recently criticised on Chinese TV for maintaining higher coffee prices in China than in any other market (one-third higher than for some comparable products in Chicago, for example). The company, which uses exclusively arabica coffee in its products, attributed these higher prices to higher operating costs in China.

The “lifestyle” statement implicit in branded coffee sees segments of Chinese society willing to pay high prices for such products. However, this factor is likely to wear thin over time, and the expected expansion of the consumer base is likely to lead to more price-conscious consumption patterns emerging. This could then affect the structure of Chinese demand.


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