Raw Input. Coffee: The froth evaporates

Drought, pests and speculation. Those are the springboards on which international prices of coffee beans soared in the past year, even as most other commodities headed South. From the start of this calendar, composite coffee prices from the International Coffee Organisation are up 52 per cent. This rise follows two years of sinking coffee prices. They dropped 24 per cent and 26 per cent respectively in 2013 and 2012.

But the sharp rise in prices paused right at the end of this calendar. The premium Arabica variety was responsible for much of the rise and Brazil, the largest producer and exporter of Arabica, was largely to blame for both the rise and the subsequent correction.

South America is the world’s leading coffee producing region, accounting for almost half the total production. It clocked an average annual output of 52.5 million bags since the 1990-91 coffee season, according to International Coffee Organisation data. Of this, Brazil has the lion’s share with average annual production coming in at 35.7 million bags. Brazil is followed by Colombia and Peru.

Brazilian coffee production usually alternates between ‘on’ and ‘off’ years. The 2014-15 season was meant to be an ‘on’ year. However, forecasts for the season predict a second consecutive decline in Brazil’s coffee production. The USDA forecast of 33.1 million bags of Arabica production for 2014-15 was a good 21 per cent lower than the previous ‘on’ year.

The spring rain scarcity in coffee-growing regions delayed the October-November flowering season, squeezing the next season’s potential crop.

Prolonged high temperatures were also to blame. This decline offset the improving crop from Colombia (an increase of 1 million bags to 12 million) and the Central America-and-Mexico region, which make up a fifth of global production.

Between January and November this year, Arabica coffee prices were up sharply by 68 per cent. For the July-September quarter, UN data pegged the average price per kilo at $4.7, the highest in three years.

The situation, however, has been reversing. A rainfall blessing on Brazil in the past few weeks, as well as more favourable weather forecasts, assuaged fears and sparked hopes that actual production would be better than forecast. Arabica prices have sharply retreated, down 8.8 per cent so far in December over the preceding month.

However, the cheaper Robusta variety hasn’t had such a blistering run. That is mostly thanks to a steady supply as key producing region Vietnam made up for lower yields with higher crop areas. For the 2014-15 season, the production forecast for Vietnam is up 1 per cent as per USDA data. This also compensates for lower production from regions such as Indonesia, also struggling with dry conditions.

Prices for Robusta, therefore, paled in comparison to those for Arabica. The ICO prices for the Robusta bean were up a tamer 17 per cent through this calendar.

Back home, rainfall vagaries took a toll on the Indian crop as well. Dry spells followed blossom showers, impacting Arabica production. But with 2014-15 being an ‘on’ year for Robusta, the variety has driven the post-blossom forecast for the 2014-15 period up 13.2 per cent over the final estimate of the previous year, according to the Coffee Board of India. Most of the increased production comes from the Karnataka region; Robusta recorded the highest increase, at a good 26.3 per cent.

Inelasticity in both supply and demand keeps coffee prices volatile. International consumption growth has held at about 2 per cent a year. The biggest news driver is the production forecast, usually out in June and November. That is done with for now. Forecasts for the 2015-16 season will drive prices hereon. Until then, further gains from the already high prices can, therefore, hold off for the short term.

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