Writing in the journal Language & Communication, coffee historian Markman Ellis describes the London coffee houses of the 1700s as a place “built upon principles of friendly and discursive sociability”. Ellis describes groups of men hanging out, drinking coffee, reading, and engaging in energetic discussions about the topics of the day. Fast forward 300 years — and you are at Starbucks, Barista and Café Coffee Day, circa 2008. The charm of freshly brewed coffee remains to entice the young and old alike. In July 2008, the news that Starbucks had closed 600 stores rocked the coffee-drinking community, the ones who needed a Café Latte to make their day. Those were the early days of the credit crisis and the contagion had still not spread. The spreading credit crisis, which has engulfed the world community, has now hit the coffee exporters hard. The price of low-quality Robusta coffee in London has dropped almost 20 per cent during the past two months to $1,850 a tonne. Traders in Indonesia put the decline in coffee prices at close to 40 per cent.
During the auction held on October 9, 2008, Tanzanian and Rwanda coffee prices eased dramatically, closely tracking markets in London and New York. Prices in other regional coffee markets including Nairobi and Bujumbura have also taken a hit, falling routinely after drops in the New York market. At the October 9 auction, 39,933 60-kg bags were offered for sale, with 34,406 bags finding buyers. During the previous auction held on September 25, 44,150 60-kg bags were offered for sale and 44,984 bags were actually sold. Benchmark grade AA sold at $110-$135.40 per 50-kg bag, compared with $175-$129.40 per bag at the September 25 auction. Grade A fetched $129-$109 per 50-kg bag, compared with $170-$133 per bag during the September 25 auction. Tanzania mostly grows Arabica coffee, but also has Robusta, thriving mainly in the northern, southern and western parts of the country in areas around Mount Kilimanjaro and Lake Victoria.
According to the ICO (International Coffee Organisation), world coffee consumption in 2007 was 124.6 million bags, compared with 121.2 million bags in 2006, an increase of 2.9 per cent. ICO has maintained world coffee consumption in 2008 at 128 million bags. In September, the ICO composite indicator price was 126.69 cents/lb, as compared with 131.14 cents in August. The average of the ICO composite indicator price for coffee year 2007-08 was 126.67 cents/lb. In the peak days of the world credit crisis in early October 2008, a sharp fall in coffee prices was witnessed. The ICO composite indicator price fell below 110 cents a lb, representing a 17.7 per cent decrease, as compared to the level at the beginning of September. ICO composite indicator price stood at 111.20 cents/lb on October 14, 2008, as against 120.15 on October 1, 2008.
The International Coffee Agreement (ICA) collapsed in 1989 as member countries did not renew it. World development banks, promoting export-led development as a way to decrease poverty, funded increased coffee production in countries such as Vietnam, which increased production over 1100 per cent in the decade beginning 1991. Most of this coffee glut was cheaper Robusta beans (Coffea Canephora). The “Big Four” multi-national companies — Nestle, Proctor & Gamble, Kraft and Sara Lee took advantage of new steam-cleaning technology to eliminate the Robusta coffee's harsh flavour. They introduced flavoured coffee — hazelnut and Irish Cream to disguise Robusta's inferior taste. In the past 10 years, as the global coffee market swelled from $30-70 billion, the revenues of growers dwindled.
There were only few Arabica growers left in Latin America and Africa, and the gourmet purveyors had to pay hand-over- fist to get the highest quality of coffee, which was short in supply.
The present dramatic fall in coffee prices is not due to deteriorating fundamentals (which has been explained above as applicable to Robusta coffee), but is more a consequence of exporters finding it difficult to secure credit in an environment of global liquidity crunch. Credit lines are being renegotiated, and the world credit crisis seems to have caught on with the beverage.
Led by tumbling prices, exporting countries are beginning to stockpile the bean in an attempt to push prices higher as the global financial crisis has made it harder for traders to get credit to buy stock. Coffee exporters in Indonesia, the world’s largest producer have threatened to halt shipments until prices recover and are seeking governmental intervention to help address the crisis. Brazilian and Colombian farmers are similarly refusing to export as a mark of solidarity.
According to the ICO, coffee fundamentals are tightly balanced. Credit restrictions and lack of sufficient liquidity caused by the global credit crisis could eventually lead to a reduction in supply of coffee.
Prices for Indonesian Robusta have dropped to as low as $1,200 a tonne, sharply down from $2,400 per tonne in August 2008.
Global consumption patterns are changing towards gourmet and health-oriented foods and therefore converting coffee into organic coffee is bound to provide great value-added benefits for the producers of coffee. Countries such as Peru are finding innovative ways to enhance demand for Peruvian coffee. Peru’s commercial mission ‘Baristas 2008’ co-organised in association with the American Chamber of Commerce of Peru and Whole Cup Consulting, and supported by the Peruvian Chamber of Commerce and Cacao, to let everybody know the quality of coffee Peru is capable of producing and was meant to invigorate its sales.
As world leaders gather for an economic summit in a bid to curtail the ongoing credit crisis and resort to concerted action, some sanity in coffee prices is expected to return along with producers who are also expected to return to the export market. As market sentiment improves, velocity of money is expected to start improving and this is bound to benefit most asset classes as the arteries get unclogged. The fact that demand is likely to outweigh supply particularly for the higher qualities of coffee beans is expected to help coffee prices recover. (The writer is the CEO of Global Capital Advisors. Financial Chronicle does not warrant the quality or accuracy of the article. It shall not be deemed a recommendation by FC for buying or selling or investment of any kind. Investments are subject
to market risks. Past performance does not guarantee future success. It is advisable to seek advice from a qualified independent advisor before investing) |