Many financial analysts expect a recovery in the agro-market in 2021, including the coffee sector. Optimism will be a positive factor for the market and prices of the commodity under trade. However, the coffee market has its own special modus operandi.
Coffee is a commodity traded on big derivatives exchanges in the world, with the volume of contracts and investment funds second only to those of crude oil. It is also the most popular consumer product. Coffee prices on derivatives exchanges are seen as the “lodestar” of the market. Therefore, it’s understandable that prices on those exchanges plunged in 2020 when the world was badly hit by the Covid-19 pandemic.
Last year, the returns on the coffee market continued on the negative trend. After 12 months by the final trading session of the year, the price on the London robusta coffee market fell 7.19% at the close, or US$109 per ton, from US$1,495 to US$1,386 per ton. The New York arabica coffee market did not fare better, with the price down 8.43% or 11.80 cts/lb, from 140.05 cts/lb to 128.25 cts/lb, equivalent to a loss of US$260 per ton. It was also the third consecutive year of negative returns on the coffee market.
While the SARS-Cov-2 hit the world’s coffee price hard, there was one thing “unexpected” to everybody, that is the worldwide shortage of empty containers in the final months of the year. This event made Vietnam’s coffee exports once again miss the US$3-billion mark. In 2020, Vietnam exported only 1.51 million tons of coffee worth US$2.7 billion, down 8.8% in volume and 7.2% in value against 2019. In the final two months of the year alone, exports were only some 180,000 tons, a modest figure amidst the coffee harvest and near the Lunar New Year on February 11 and 12, 2021.
That said, 2020 is the second consecutive year of the coffee export fall, not only in volume but also in price.
First thing first
Prices are important, but in the new situation, the market and the market share should be the first to consider. Statistics of the International Coffee Organization (ICO) for 12 months by end-October 2020 show that Vietnam accounted for more than half of global robusta coffee exports of 2.95 million tons, up 0.80%, while arabica coffee exports in the period were nearly 4.71 million tons, down 6.40%.
Vietnamese coffee is exported to some 80 countries and territories, but it is under many pressures, including subjective factors such as the high cost price (VND28-30 million per ton), the lack of a shipping fleet to increase selling power as well as the strength of export commodities, and the inadequate attention to expanding warehouses in export markets to proactively address unexpected events once the supply chain is disrupted.
In 2021, almost the whole world has to accept “co-habitation” with the SARS-Cov-2 though vaccination against the virus is being intensified. Unfortunately, the coronavirus mutates unpredictably. Therefore, despite the available vaccine, the pandemic is unlikely to be ease for Vietnamese coffee to be shipped abroad normally. In her television speech on December 31, 2020 to welcome the year 2021, German Chancellor Angela Merkel said, “The recent days and the recent weeks are the most difficult times for our country. This may last some more time. Winter is still harsh. The challenges induced by the pandemic remain very big.” This statement is also a warning for coffee farmers and traders in the upcoming time, that the coffee supply chain is still unstable despite the great global efforts for vaccination against the pandemic.
Upward price trend?
The coffee market is under a psychological pressure from Brazil’s good coffee crop. Every time when coffee prices fall, coffee traders are often explained that Brazil has a bumper 2019-2020 coffee crop of up to 4.1 million tons and some 2.64 million tons can be exported! Still, it should be learned that when Vietnam began selling her coffee in the market, Brazil had already sold out 70% of its coffee output. The price determination role of Brazil is becoming lighter and is transferred to other countries like Vietnam, Columbia and Honduras.
The above analysis shows that it is not necessarily the demand-supply factor, but other factors that are more important and decisive for the coffee prices at each point of time and over the long term.
The weak Brazilian reals (BRL) against the U.S. dollar (US$) has encouraged Brazilian coffee farmers to increase selling over the past time. The BRL had depreciated 29.29% against the US$ by end-2020. At times, it fell to 5.99 reals per dollar. However, it gradually increased to 5.10 reals per dollar at the year’s end. Market observers have found that there is intervention by the Brazilian central bank whenever the BRL falls to 5.6-5.8 reals per dollar. Money market analysts have forecast that the BRL will rise to 4.5-4.8 reals per dollar in 2021. The domestic currency gain will ease the selling pressure though the coffee production may be large(1).
The dollar index (DXY) has recently dived to the lowest level since 2018. The United States and consuming countries have continued money printing to save their economies. Many forex analysts think that the DXY increase, if any, would occur only during the handover of the White House to Joe Biden. In the context of economic support amidst Covid-19, strong money supply is inevitable. The DXY, currently at 90 points, is likely to fall to 85 and even below 80 points rather than to increase to over 95 points. Once the dollar loses its value, it is the opportunity for coffee traders to bid up.
Renovation imperative
The world has turned to co-living with Covid-19 after suffering the crisis induced by the pandemic. Coffee consumption dropped in 2020 and may continue to be weak this year. Due to the particularity of the coffee trade, it is increasingly imperative to renovate the thinking of and the modus operandi for the trade.
The renovation should start first with the demonstration of how coffee is produced, stored and packed, using digital technology such as artificial intelligence (AI). Origin tracing is obligatory and “connection” is necessary. Nowadays, there should be no concern for “secret” leaking from publicizing the output and production and trading activities. One can search Google Earth for place and time to know such information as the coffee area in a region and the number of trips for coffee warehousing per day.
Vietnamese coffee traders and farmers think quick but often act slow. They are not to blame because investment in technology for connection with partners to join a prestigious and stable supply chain requires large funds. It’s impractical to ask small traders and producers to make such an investment. Therefore, the Government should require trade associations, especially the coffee association, to develop an origin tracing and connection system, and set the target that a large number of businesses must join the sustainable supply chain. This can be realized by using the contributed export fees instead of spending the fees for marketing and visiting as often done.
Many international coffee traders are developing subsidiaries for specialty coffee trade to expand connection with coffee farmers and gradually move towards origin tracing as a normal practice in production and trade. Many foreign traders have spent large funds for this endeavor. Coffee store chains in Vietnam are pioneering in this move, though the scale is still fragmentary.
In sum, the coffee market has many positives, but it is not for the bull bidder, as the price movement will be affected more by the capital pressure than by the supply-demand factor. The coffee market would remain erratic, at times to the extreme. This year, it is not the place for those with small capital and weak hearts if they cannot find out an up-to-date production and trading modus operandi.
By Nguyen Quang Binh
(1)US$/BRL to plunge below 5.00 in 2021, published November 25, 2020 on “fxstreet.com”
