Coffee Prices Slump, Continue Lengthy Decline on Heavy Supply

Joel Anderson  |

Coffee prices slumped 3 percent on Friday, dropping off of the modest gains made over the course of November. On the whole, global coffee prices continue to slump dramatically as supply continues to soar. Since peaking at $2.34 a pound in April of 2011, the International Coffee Organization (ICO) composite price has declined steadily, reaching just $1.07 for October, a monthly rate not seen since 2007.

On the whole, November has saw a modest recovery in price. After an October that saw prices slump over 7.5 percent, prices continued to slide early in the month, hitting a bottom under 102 cents a pound that represented a seven-year low. Prices rebounded to over 110 cent a pound as the month wore on, a nearly 8 percent climb. But today’s decline saw prices fall 3.9 cents a pound to about 107.5 cents a pound.

Record 2012/2013 Season from April Group

Declining coffee prices are connecting to the excellent production coming from global coffee growers. Production in the 2012/2013 growing season for the April group, which includes Brazil and represents over 45 percent of global arabica production, soared over 18 percent year-over-year to 70.6 million bags, a climb that has producers scrambling ways to stay profitable. Production from the April group is the highest it’s ever been going all the way back to 1990, and it’s 9.5 percent higher than the second-highest season during that period, which came just two years ago in the 2010/2011 season.

"Given that chronic excess supply is likely to continue into 2014-2015, prices will remain under pressure, between 90 cents and $1.20 a pound," said Macquarie agricultural commodities analyst Kona Haque.

It highlights an issue for coffee growers in that spikes in supply can depress prices in the long term. Coffea plants flower every nine months and produce for 50 to 60 years after planting.

"Unlike crops such as soybean, coffee plants are not harvested then replanted each year, so it can take a long time before supply falls because of low prices," said Capital Economics economist Thomas Pugh to AFP.

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In some cases, crashing prices have resulted in prices so low they’re below the cost of harvesting the beans.

"It's good coffee — they should be drying it and getting it ready for export," said Celso Scanavachi, an engineer for the Brazilian Coopinhal farm cooperative, to Globalpost while describing unharvested coffee beans. "The producer has abandoned 40 percent of the crop; the retail price doesn't cover the cost of harvesting."

Brazil, Vietnam Take Action

This week also saw the world’s two largest coffee producers taking action to arrest the sliding price of coffee. Brazil decided in August to buy coffee at $132 per 132-lb bag to support prices, establishing a minimum price, and it announced a new series of measure to support coffee farmers on Friday that included suspension of debt payments by struggling growers until 2015. It’s a standard move by the Brazilian government that should give farmers the financial flexibility to hold onto beans until prices rebound rather than selling them at rock-bottom prices in the current market.

"The debts of production and commercialization of the crop will be renegotiated with the first payment falling due in July 2015," said Minister of Agriculture Antonio Andrade. "We want producers to stop selling coffee to pay their debts."

Vietnam, meanwhile, announced plans earlier this week to lend money to exporters so that they could hold back as much as 20 percent of their supply until prices improve. Luong Van Tu, the chairman of the Vietnam Cocoa and Coffee Association (Vicofa), told the Wall Street Journal that low prices, if left unabated, could damage the country’s coffee industry.

 "If prices stay low for a long time, farmers will stop watering and fertilizing their coffee trees and ultimately will cut them down to grow other crops," he said.

Starbucks (SBUX) Looks to Benefit

While low coffee prices are a relative disaster for producers and exporters, one of the world’s biggest coffee sellers is looking ahead to a solid year. Starbucks announced earlier this week that it expects a $110-120 million benefit from crashing coffee price, up from the $97 million they are likely to save in 2013. Starbucks contracts its coffee off the general market and in advance, so it won’t see the benefits of the current market until next year.

“They’re not buying on market, they’re buying throughout the year,” said Sara Senatore, an analyst at Sanford Bernstein.

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