The Coffee Crisis

Coffee farmers all across the world are now victims of a coffee crisis. This coffee prices have fallen to a thirteen year low. The prices have dropped by 36% since November 2016. If experts are to be believed, the fall in the prices of coffee could continue and could become even steeper over the course of time. This is threatening to take many farmers out of business.

The prices of coffee are currently close to $1.1 per pound. However, most coffee farmers produce this crop at a cost of $1.2 per pound. Hence, the market rates they are getting are not enough to even compensate them for the price of inputs that they have used to cultivate the crop.

This is the reason that entire states and countries are now finding the cultivation of coffee unsustainable. For instance, many Columbian famers are unable to sell their coffee produce for a profit. Hence, they are resorting to growing coca which is later processed to become cocaine!

In this article, we will have a closer look at the coffee crisis as well as the fundamental reasons which are driving it.

The Brazilian Impact

A supply glut from Brazil and Vietnam is the reason stated for the historical decline of prices in coffee beans. However, the production of coffee beans in Vietnam is not of much consequence. Brazil is the main supplier of coffee around the world. Many analysts call it the Saudi Arabia of coffee. This is because just like Saudi Arabia controls the production of and therefore the price of oil, Brazil controls the output and price of coffee. Close to 35% of all coffee consumed in the world is cultivated in Brazil which gives the country an impeccable edge over its competitors.

The problem is that Brazil has witnessed a bumper crop despite this being an off season. Coffee growers see alternate years of high output. One year of high output is followed by another one which has low output. This was supposed to be the year with low output. However, Brazilian farmers were still able to harvest 53 million bags of coffee which is unprecedented. Coffee buyers, who were spoilt for choice, because of the bumper crop have started labelling crops as low quality and have started dropping the prices.

Why the Fall is Likely to Continue?

If financial market experts are to be believed, the worst may not yet be behind us as far as coffee prices are concerned. The prices could continue to fall because of the following reasons:

  • Growth in Consumption: The rate of growth in coffee consumption is about 1.5%. However, at the same time, the growth in coffee production is about 3.2% per annum. Hence the production growth far outstrips the consumption growth. Also, most of the consumption growth is for the famous Brazilian coffee beans. Hence, as far as other producers of coffee are concerned, their situation is going to get further worse as the buyers of coffee will be further spoilt for choice.
  • Currency Market: Brazil supplies more than one third of the world’s coffee. This is the reason why coffee prices are highly impacted by the exchange rate of the Brazilian real. The price of coffee is directly correlated with the Brazilian real. This means that when the real moves upwards so does the price of coffee and vice versa. This is because coffee is mostly traded in dollars in the international market. A stronger real makes coffee less valuable. Hence, suppliers stop their sales in anticipation of higher prices in the future. This leads to a shortage and the prices end up increasing
  • .

    On the other hand, a weaker real makes coffee more valuable. Suppliers get more real currency in exchange for fewer dollars. Hence, they are willing to sell as much coffee as they can. This leads to a glut and exerts a downward influence on prices. This is how the prices of coffee end up mirroring the Brazilian real.

    The problem is that the dollar is getting stronger against the Brazilian real every day. The value of the real is likely to fall even more in this year. This is the reason why the prices of coffee are expected to see a downward trend this year.

  • Futures Market: Lower coffee prices have got coffee consumers around the world cheering. However, coffee producers around the world are in tears at the same time. This is because the prices of coffee are bound to stay low. The 2019 July future suggest that coffee prices will hit a twelve year low! Both fundamental and technical analysis are ruling out rise in coffee prices in the near future. As a result, the falling prices have become a self-fulfilling prophecy as no trader is willing to take the opposite position due to the fear of losing their shirt!

The bottom line is that the coffee market is going through a bear phase. A bumper crop along with a weak currency may spell doom for many coffee traders. However, since both these factors cannot be controlled, there is no way to arrest the fall in the price of coffee.

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