COFFEE: Prices have soared 25% this year as bad weather hit crops in major arabica producer Brazil and especially top robusta grower Vietnam. With the typical robusta price discount collapsing. This is the latest supply-driven agricultural price squeeze, after orange juice last year and cocoa this. It’s made agriculture the best performing commodity segment (DBA) this year, up 27% versus 4% for broader commodities (DJP). By contrast US retail coffee prices have fallen 2% the past year, but are likely now set for a renewed catch up (see chart). As producers and coffee chains, from Nestle to Starbucks (NASDAQ:SBUX), continue with their price premiumisation strategies.
CONSUMER: Europe drinks 30% of all the world’s coffee. With the five Scandinavian countries averaging 21/lbs per person or more than four times the US level. Whilst Asia is the 2nd largest consumer, and per capita consumption growing fast off a low base. Beans are a fraction the end coffee price. But the latest commodity rise will likely combine with rising labour and energy costs and companies price-led strategies. Starbucks (SBUX) raised its average ticket 9% last quarter versus a 1% boost in transactions. An average hot Latte now retails for $4.62 in the US. The Nestle (NESN.ZU) Nespresso unit saw prices rise more than twice as fast as volumes last year.
COMMODITY: More delicate and harder-to-grow arabica is 60% of total supply and dominates the pricier and higher-quality ground market. Whilst Robusta dominates instant coffee and has been an average 30% cheaper. Brazil leads the global coffee trade, as the largest arabica producer. Whilst Vietnam is the 2nd largest producer, focused on robusta. The latest production shortfall threatens the International Coffee Organisation forecast of a return to a small coffee market surplus this year after two years of big deficits. Global production was seen surging 6% this year to a record 178 million 60kg bags. Outpacing a steady 2% rise in coffee consumption.
