It was hard to realize that I have named my blog after the world’s favourite stimulating beverage and still I haven’t written anything about coffee. People depend on coffee, rely on coffee, create blogs about coffee and I don’t spend not even a single line on the topic? Too bad!
The problem is that I couldn’t find a worse moment to talk about it. We should all run into our backyard atomic shelter because this year we are going to face the first coffee shortage in the history of humanity. The first alarm bell was an unusual growth in the futures market: since the beginning of this month the futures for Arabica coffee (the most exquisite variety) almost doubled their value. This is a critical situation for the coffee industry worldwide and we are going to assist to a major change of the status-quo in these very next months.
Let’s start from the beginning. What is a future? A future is a contract, where the two parts decide to buy/sell a determinate amount of a certain good, at an agreed price, in a specific moment in the future. The kind of goods that people can sell/buy are usually commodities (like agricultural crops, precious metals and energy) and of course currencies and financial instruments. We are interested in the first group, the coffee futures. The future contract has a different utility for the seller and for the buyer. The coffee producers use it as a way to decrease risks, knowing in advance that their harvest will be sold at an agreed price. The buyers rely on this financial artifact to obtain enough stock (coffee in this case) for their business, avoiding market oscillations. Finally, traders can also buy futures as a financial tool, betting on the price raise. Their goal is to make a good profit when there is a positive difference between selling price (future) and buying price (present).
Since the beginning of February, the Arabica coffee price per pound climbed up from $1.14 to $1.80, converting the coffee futures in an incredibly profitable investment (+50% in less than a month). What happened to make the coffee so expensive? Brazil had an extremely dry weather this winter, influencing negatively its coffee crop. The insiders officialized that the national output was almost 20% below the usual production, a low record. And being Brazil the biggest coffee exporter of the world meant that the global market was going to suffer a tremendous shortage. The direct consequence was a skyrocket increase in the futures price. The situation is so critical that also less valuable coffee varieties experienced a price growth, as buyers are already looking for cheaper alternatives to compensate the Arabica shortage.
If the Brazilian shortage created the conditions for the price raise, it is also true that an ongoing trend added gas on the fire. The contributory cause is the growth of the coffee producer internal market, mainly in Asia and South America. Countries that for centuries have only exported coffee to America and Europe are now discovering a new taste for their own products. The result is that an increasing share of the overall southeastern and south american crop never reaches the international market, raising the feeling of a coffee shortage. The same feeling that is pushing the future stock price to $2 per pound.
Supposing that none of us has invested in coffee futures (what a shame), what kind of consequences must we fear in our daily life? It is very unlikely that you will wake up next month with your favorite coffee shops out of business. It is also unlikely that Starbucks will raise their consumer prices in order to recover from the raw material price increase. What is much more realistic is that your coffee will just taste worse. In order to maintain the same production level many coffee companies are starting to change their mix in favour of a cheaper Robusta and other varieties. Top quality brands and indie companies will boost their sell thanks to the differentiation from the mass market. Offering only pure Arabica variety and special brews will catch new coffee lovers who don’t agree with the Starbucks’ model.
I am also afraid that this astronomical price raise will jeopardize the fragile south-tropical environmental situation. The Arabica futures will reach $2 dollar per pound in a month, making new coffee plantation in the coffee belt very profitable. What will happen if there will be not enough space to increase the current production? Probably just make some more space. Destroying thousands of square miles of Amazonian forest, the real heritage of Brazil. So for the forest sake let’s just hope that this rain season will be abundant, hopefully it would rain coffee in the field.
Note: Before I stated that this was the first time in the history of humanity for coffee price to grow vertically. But to be precise this is actually the second one: the previous occasion was in the 1977 and the American government responded with a strong boycott. People actually stopped drinking coffee until the prices got back to normal. Some states went even further, like South Florida grocery stores that set a purchase limit of 1 pound per person. Overall international consume felt a 17% in a year.