Robusta Beans Lead to Supply Shortage in World Coffee Market

Even as the output of robusta, the lower quality bean, sliding to a level not seen since 2012, analysts and experts predict that the supply shortage in the world’s coffee market is forecast to continue for a third consecutive year.

With output at 151.6m bags and consumption at 155.1 milion, for the year beginning in October, the International Coffee Organization forecasts a supply shortage of 3.5 million 60kg bags of coffee.

Even though, thanks to bumper crops in Brazil, Colombia and Honduras, there has been a record production of arabica coffee, the higher quality bean, the industry would be hit by a shortage this year.

The ICO said that “less positive with lower crops expected from most major origins” are the prospects for robusta supplies in comparison.

Coffee manufacturers and retailers face a decline in profit margins due to the cost increases and the predictions of a tighter robusta market this year comes amidst such a tight business scenario. In order to add a kick to the flavour as well as lowering the overall cost robusta beans blended with arabica  or are primarily turned into instant coffee.

Process for packaged coffee would be increased by an average of 6 per cent for its coffee sold under the Folgers, Dunkin’ Donuts and Café Bustelo brand names, J M Smucker, a leading U.S. coffee manufacturer, this week said. The increase did not cover products on sale in Dunkin’ Donuts restaurants, the company said.

Primarily due to the effect of the El Niño weather phenomenon, there was a severe drought in Brazil, and dryness in Vietnam and Indonesia which badly hurt the production of robusta last year. And he world output is expected to fall to the lowest level since 2012/13 as a result.

Trading at $2.190 a tone and compared to the price at the beginning of 2016, the lower quality beans are 43 per cent higher. Aalthough plentiful supplies later in the year triggered profit-taking, the robusta rally also supported arabica prices in the middle of 2016.

“Prospects for a recovery in Brazil’s production in 2017 are slim” for robusta, according to Carlos Mera, analyst at Rabobank. Analysts expect the price difference between the two beans to narrow with robusta supplies continuing to be scarce while arabica remains in abundance. The price difference between the two beans has fallen about 13 per cent since the start of 2016, referred as the “arbitrage” by analysts and traders.

With more coffee roasters and retailers reducing the amount of robusta, and increasing the share of arabica beans, if the price difference narrows further, it is likely to lead to a shift in coffee usage.

Down from 35.6 per cent, the robusta coffee variety accounted for 35.1 per cent of the overall market in 2016/17, and Rabobank expects “a large reduction in the share of robusta” among importers and a reduction in the contribution with it touching 34 per cent in 2017/18.

(Adapted from CNBC and Financial Times)


Categories: Economy & Finance

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