((Automated translation by Reuters, please see disclaimer https://bit.ly/rtrsauto)) by Maytaal Angel
Global coffee prices have hit their highest level in almost 50 years due to poor weather conditions in Brazil and Vietnam, forcing roasters such as Nestlé NESN.S to raise prices and consumers to seek less expensive drinks. expensive in the context of the cost of living crisis.
The price surge will benefit farmers with a bountiful harvest this year, but it will pose a problem for traders, who will face crushing hedging costs on stock markets and a rush to receive the beans they have purchased in advance.
WHAT MAKES PRICES RISE?
Production problems linked to bad weather in Brazil and Vietnam have meant that global supply has been lower than demand for three years. This caused KC-TOT-TOT stocks to run out and pushed ICE exchange benchmark prices KCc2 to a record high of $3.36 per pound.
The last time coffee traded this high was in 1977, when snow destroyed swaths of Brazilian plantations. However, the shock to consumers was much greater at the time. Adjusted for inflation, the price of $3.36 per pound in 1977 would be equivalent to $17.68 today.
Meanwhile, experts predict another year of lackluster coffee production.
Brazil, which produces nearly half of the world’s Arabica – premium beans used mainly in roasted and ground blends – this year experienced one of the worst droughts on record .
Although the rains finally arrived in October, soil moisture remains low and experts say the trees are producing too many leaves and too few flowers that turn into cherries.
In Vietnam, which produces some 40% of the robusta beans typically used to make instant coffee, a severe drought at the start of the year was followed by excess rain since October.
Consulting firm StoneX forecasts that Brazilian arabica production will fall 10.5% to 40 million bags next year, which will be offset by an increase in robusta production, reducing the country’s overall harvest of 0.5%.
In Vietnam, the harvest could decline by 10% by the end of September 2025, worsening the global shortage of robusta.
WHY ARE TRADERS CONCERNED?
-Brazilian traders Atlantica and Cafebras are seeking court-supervised debt restructuring due to soaring coffee prices, crushing hedging costs and delivery delays.
Debt restructuring under court supervision precedes bankruptcy if negotiations are unsuccessful.
Traders who purchase beans from Atlantica and Cafebras typically take short positions in the futures market to hedge their exposure to the physical market.
Fearing that they will no longer receive their physical coffee from Atlantica and Cafebras, many traders are liquidating their short positions on the futures market, which have become loss-making.
Liquidation of short positions involves purchasing or acquiring long positions in the futures market, which has the effect of driving up prices.
Rising futures prices then lead to increased margin calls or deposits that traders must pay to protect against trading losses, increasing stress in the industry.
IMPACT ON ROASTERS AND CONSUMERS
Rising coffee prices are a problem for roasters.
The head of Nestlé, the world’s largest coffee company, was ousted earlier this year after the board became unhappy with weak sales and loss of market share due to price hikes. prices, which encouraged consumers to turn to cheaper brands.
Roasters tend to purchase coffee several months in advance, meaning consumers will likely see the price increase in 6 to 12 months.
Consumers who consume outside will feel less of the effects of the current price increase.
Roasters like Starbucks SBUX.O that sell primarily to coffee shops should fare better as the global KCc2 coffee price is only about 1.4% of the total price of a typical $5 cup of coffee at a coffee shop .
