Coffee's Still Reeling From a Glut. But for How Much Longer?

(Bloomberg) -- Coffee bulls have had a tough couple of years as prices kept sliding on the back of a global oversupply, and for arabica investors, 2019 is so far proving no different.

The variety, favored for specialty drinks such as those made by Starbucks Corp., is trading near the lowest since September and isn’t far off a 12-year low. Much of the slump is because of Brazil, which harvested a record amount of coffee in 2018 and is preparing to collect another big crop this year.

The question is whether prices have further to fall, or if the market is about to turn a corner. Here’s what’s driving coffee and what to watch out for:

Slumping Price

Arabica has been one of the worst-performing commodities in the past two years. In top producer Brazil, years of high local prices allowed farmers to invest more, leading to better yields, while favorable weather helped boost production. A weaker Brazilian real in the past two years has also encouraged exports and pushed down the dollar price of coffee.

Arabica futures are down about 4 percent this year at 97.70 cents a pound in New York. Robusta has fared better, posting small gains since the start of January.

Too Much Supply

South America has accounted for the bulk of the increase in output this season, and a second straight glut will total 2.3 million bags, according to the International Coffee Organization. While some growers are struggling, it’s hard for them to react to switch to other crops as coffee trees last several years once planted. When prices are low, farmers sometimes use less fertilizer or prune trees, but this takes time to impact supply.

“Coffee prices have failed to maintain any gain amid a large surplus,” said Rodrigo Costa, the U.S.-based coffee director for Brazilian trading company Comexim. “When the price goes up, producers take advantage by selling, showing to the speculators that there are comfortable inventories available, driving prices down again."

Premium Beans

Arabica beans command a premium over the more bitter robusta variety favored in instant coffee. But with arabica underperfoming, that gap has narrowed to near a 20-month low, and isn’t far off the lowest in more than a decade.

Still, the premium would probably need to narrow further for roasters to start changing the amount of each variety they use in their blends. That’s because roasters tend not to alter blends too often as consumers get used to the taste.

Market Outlook

Speculators have largely been net bearish on coffee for about 18 months, but is it time to change tack? Olam International Ltd., the world’s second-largest supplier, said futures could rally amid a smaller surplus as bad weather hurts producers in major growing regions such as South and Central America. Brazil’s Comexim sees arabica rebounding to as high as $1.20 by mid-year amid the prospect of a stronger real.

On the other hand, Rabobank International sees prices averaging $1.03 through June, and $1.05 in the second half.

To contact the reporters on this story: Áine Quinn in London at aquinn38@bloomberg.net;Fabiana Batista in Sao Paulo at fbatista6@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Nicholas Larkin

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