Coffee price forecast 2020
With more than 2bn cups consumed around the world every day, we look at the coffee price forecast for 2020
Coffee price forecast
With more than 2bn cups consumed around the world every day, coffee is one of the most actively traded commodities in a market that’s growing by around 2 per cent each year. Brazil tops the table, producing 40 per cent of the world’s coffee, followed by Vietnam, Indonesia, Columbia and Ethiopia.
Coffee as a commodity
Two varieties of coffee plants are typically grown for worldwide coffee production purposes: Arabica and Robusta, with Arabica making up 75 per cent of the total production. The seed or cherry of the plant, known as the "bean" is roasted and ground to make coffee. Brazil produces mainly Arabica beans, while Vietnam grows predominantly Robusta beans.
Green, unroasted coffee beans are transported in 60kg (132lb) bags worldwide with major consumers being the US, European Union, Japan, Canada, South Korea and Russia.
Historical coffee prices
Looking back at the Arabica spot price, we can see that the coffee price history has seen some fluctuations in the past decade.
In 2011, Arabica coffee price increased to $3.06 (£2.35, €2.75) per pound, 90 per cent of its historical all-time high of $339.86 per pound seen in April 1977.
However, such highs have not been seen since, with a relative downward coffee price trend observed since 2016.
The first quarter of 2019 saw both Arabica and Robusta coffee prices decline sharply, with the former plummeting to an 11-year low of 87 cents per pound in May 2019.
However, things brightened slightly by the end of the decade, with December seeing a rise to $1.36. Today, a pound of Arabica beans is trading at $1.19 (£0.91, €1.07).
Coffee price news
So, what has caused coffee price’s fall since 2011? Coffee market analysis indicates several factors at play.
Overproduction in Brazil is one factor that has depressed prices, with Brazil’s national currency, the real, another. While Brazil produces 40 per cent of the world’s coffee, it is priced in US dollars. However, the Brazilian real is 60 per cent less valuable than it was in 2011, compared with the USD and currently has an exchange rate of 4 real:1USD.
This has resulted in cheap coffee and hardship for coffee farmers, who struggle to cover expenses and make a profit. A rise in the value of the real could thus significantly increase the price of coffee.
Brazil has also produced a bumper crop in the past year, which has helped to drive prices down to rock-bottom levels, in a further blow to farmers.
However, this has caused a problem. In October 2019, Brazil’s largest grower and shipper of coffee, Cooxupe ran out of beans, with only 4.9m bags of coffee out of the 5.7m bags expected.
Lucio Dias, commercial director at Cooxupe told Bloomberg: “Funds are overselling coffee in New York while in the physical market there’s no more supplies and demand has been strong. We don’t know where the world will get coffee in the next six months.”
Supply and Demand
Supply can and does vary from year to year and as an agricultural commodity, coffee is heavily impacted by seasons and environmental issues affecting the plantations where the beans are grown.
While good weather can result in a bumper harvest and plummeting coffee prices, a drought or flooding that affects coffee production can send prices sky high. Coffee prices are less affected by demand, which is quite consistent and tends to increase in a linear fashion.
But Dr Tim Schilling, director of the World Coffee Research Institute, says: "The supply of high-quality coffee is severely threatened by climate change, diseases and pests, land pressure, and labour shortages – and demand for these coffees is rising every year."
The “logical result is that prices will need to rise, especially for the highest quality coffees which are most threatened”.
Other factors that can affect the price of coffee include geopolitics, discretionary income, transportation and oil prices and health issues.
Political crises can alarm investors and create concerns regarding supply chains. As coffee needs to be transported the price of oil can have a huge effect, meaning that the price of coffee can be linked to that of oil.
Coffee consumption can be negatively affected in times of high unemployment, where coffee is seen as a "want" not a "need". However, prices can be boosted by new markets of consumers.
China’s coffee culture, for example, has been steadily growing in recent years. Starbucks (SBUX.O) opened 600 stores in the country in 2019 alone and has even more ambitious plans for the future.
Local Chinese firm, Luckin Coffee (LK.O) is growing even faster, having recently overtaken Starbucks as the country’s biggest coffee chain by number of stores and is now expanding into vending machines that offer freshly brewed beverages and snacks.
Coffee price forecast
Analysts have differing views as to Arabica coffee price forecast for2020. Some believe that supply/demand fundamentals could see coffee prices rising.
Barclays commodities analyst, Sudakshina Unnikikrishnan, told commodity.com: “We expect prices to hit further highs on production downgrades, the decline in global stocks and supply tightness that should keep markets fearful of any disruptions.”
James Hearn, co-head of Agriculture at commodities broker Marek Spectron agrees, believing that low Arabica prices fail to reflect the impending shortage. As government supplies are used up while demand continues, prices could rise significantly.
Brazilian real and its effect on coffee valuations
Investing Haven has a bullish bias towards the end of 2020, which is exacerbated in 2021, that depends heavily on what happens to the Brazilian real. It stated “When the Brazilian real turns bullish it will create an explosion in the price of coffee.”
As the real seems to be in a bottoming formation with the USD the odds favour a bullish trend. It also uses coffee’s Commitment Of Traders (COT) report, which it believes is supportive for coffee prices in 2020. Investing Haven believes we should watch for a bullish breakout price point of $1.10 combined with a bullish trend in the Brazilian real which could see a peak of $2 in 2021 or even late 2020. But it stresses, this is only the case if the real turns bullish against the US dollar.
But not everyone has such a bullish view for the price of coffee in 2020.
Gov.Capital, which uses a custom algorithm to predict the coffee future price has a more pessimistic short-term view, reckoning on the price dropping by 21 per cent to $93.338 in one year. Interestingly, it predicts that things will look up in the longer term, with the coffee prices going up to $461.159 per pound in five years.
So, what can we conclude about the Arabica coffee price forecast for 2020? It is clearly dependent on a surprising number of factors; from geopolitics to weather, oil prices to the value of the Brazilian real. One thing is certain; coffee is definitely a fascinating commodity to watch in 2020.
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