Emerging Market Demand Surges as Lower Production By World’s Top Coffee Growers Forecasted
The coffee crop of Brazil, the world’s largest coffee grower producing about 35% of the world’s coffee, is forecasted to decline 13% this year which is the off-year of a biennial cycle of lower and higher output for the country’s prized Arabica coffee plants.
Colombia has also forecasted lower production which will make three straight years of disappointing harvests due to inclement weather as well as coffee plant damage from coffee plant diseases and pests including the devastating fungus called coffee leaf rust.
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Higher Robust Prices Put Pressure On Arabica Prices
Colombia is the world’s third largest grower, now surpassed by Vietnam which grows mostly the lower grade Robusta coffee. Vietnam’s disappointing coffee harvests are contributing to the overall shortage of coffee and the strong upward pressure on Arabica prices.
The current shortage of coffee is primarily due to a shortage of the higher grade Arabica coffee which comprises most of the specialty coffee market including specialty coffee drinks such as Lattes and Cappuccinos served at your local Starbucks.
Major World Coffee Producers Have Most Impact On Coffee Markets
While numerous other countries have shown improving coffee production, their output is dwarfed by the behemoth producers so that even bumper crops among the other countries are unlikely to make up for a bad year of coffee production in Brazil and Colombia.
Meanwhile world demand for coffee is rising ever higher. Emerging markets including China, Brazil, India, Latin America and Russia are all seeing much higher growth in the demand for coffee (e.g., 5% to 20% annually) than the worldwide average of 2% growth annually.
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Coffee Price Increase in 2011-2012 Due to Coffee Shortage continued:
Brazil To Surpass the United States in Coffee Consumption Adding to Coffee Price Pressures, China Gaining Fast
Brazil will soon surpass the U.S. in their demand for coffee and by 2015 will need to keep half of its own crop just to meet internal demand. Brazil’s coffee crop is about 75% of the higher grade Arabica rather than the lower grade Robusta.
Some coffee industry analysts are forecasting that it will be China that will eventually take the number one spot in the world in coffee consumption and Starbucks, which has a 70% market share there, will be helping to spur that growth having recently announced that they will be opening 1,000 new stores there.
The increased demand for coffee at a time of shrinking supply has placed strong upward pressure on coffee prices for the last year with no end in sight due to new concerns about coffee production in 2011 and 2011 among the world’s major coffee producers.
Speculative Trading in Coffee Futures Markets Drives Up Coffee Prices Further
Exacerbating the upward spiraling prices of coffee has been the influx of large amounts of investor money into coffee futures markets. This speculative trading including huge amounts of hedge fund money has pushed coffee prices up even further, with futures prices doubling in the last year.
The huge investments in commodity speculation (in anticipation of future higher prices) is largely attributed to the Federal Reserve maintaining artificially low interest rates and easy money, easy credit policies that have driven huge amounts of cash into commodities markets driving up commodity prices across the board.
Lower Dollar Creates Higher Coffee Prices for Americans
Meanwhile the U.S. has seen a weakening dollar due in large part to the huge amounts of new debt that have been accrued in recent years since the financial crisis, and a devalued US dollar effectively creates higher commodity prices, including coffee, for all Americans.
Coffee demand is expected to outpace supply in the near future with demand estimated at around 135 million bags while supply will lag with only about 131 million bags (sixty-kilogram bags of green coffee beans).
During the next decade overall, unless supplies increase significantly, the coffee supply is forecasted to fall behind demand by about 30 million bags.
Coffee Price Increase in 2011 and 2012 Attributed to Coffee Shortage continued:
Coffee Production Problems Contribute To Price Pressures
Other countries that have seen some problems with decreased cofffee production include Indonesia, Guatemala and Costa Rica. In Kenya the increasing real estate pressures have caused a price spike for the famed Kenya AA Coffee (on the Nairobi Coffee Exchange) and saw coffee plants being uprooted in central and Western Kenya.
Low Coffee Stockpiles Contribute Make Markets Vulnerable To Coffee Price Increase in 2011 and 2012.
Also exacerbating the coffee shortage and upward price pressures are the historically low coffee stockpiles worldwide. Having been largely depleted last year, this removes a large price cushion that helped to shield consumers from sudden fluctuations in world coffee markets.
With the stockpiles depleted the coffee markets will be much more vulnerable to any new supply disruptions, particularly in regards to the world’s major coffee growing regions which as stated above all have some serious concerns.
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