Low coffee price leaves farmers swallowing losses

by Agrimoney.com

The International Coffee Organization raised doubts over a revival in the premium of arabica coffee over robusta beans, as it cautioned that the weak market had cut prices below the cost of production.

The intergovernmental group acknowledged some recovery in the arabica premium last month, by 1.7%, from April levels which at one point fell below 40 cents a pound – less than half the gap a year before.

The small revival has been attributed to improved prospects for coffee crops in Vietnam, the top producer of robusta coffee which, in generally being considered of lower quality than arabica, trades anyway at a discount.

However, the ICO, flagging that the "the structure of the market has changed significantly", cautioned that the arabica premium would struggle to make much more headway, echoing comments on Monday from Macquarie.

Emerging market demand factor

Arabica prices faced pressure from "the new reality of a greatly diminished on-off cycle in Brazil", the top producing country, which is seeing a reduction in the swings it sees between alternate higher and lower harvest years.

"The possibility of increased carry‐over stocks, is resulting in a more constant availability of arabicas year on year," the ICO said.

"Parallel to this is the sustained appetite for robustas," evident in a "negligible increase" in certified stocks held for delivery against London futures "despite the strong levels of shipments coming from Vietnam".

The ICO attributed the rise in demand for robusta from the growth in demand for coffee in emerging markets, which prefer the soluble coffee typically high in robusta content.

"Given these developments, the current range for the arabica/ robusta arbitrage could be expected to continue in the short‐term."

Production costs rise

The comments came as the group cautioned that the decline in coffee prices - which have more than halved over the past two years for New York-traded arabica futures - was causing financial hardship among producers.

Although world arabica exports have remained stable at 8m-10m bags a month over the past two years, revenues from this trade has slumped from more than $2bn to about $1.5bn.

Meanwhile, "the cost of production has been rising in many exporting countries" particularly in Colombia – which this year witnessed demonstrations by producers over low prices - where they have soared nearly 150% since 2004.

"There is concern that many producers may be selling at a price which is not remunerative compared to the cost of production.

"Whether the price paid to coffee growers has dropped below the cost of production will vary from country to country, but the trend appears to be heading in that direction."

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