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Tuesday, June 18, 2024

Where is the coffee market headed?

By Nguyen Quang Binh

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Vietnam and other major coffee-exporting nations are halfway through the 2022-2023 harvest season, but uncertainties are gripping the market.

Some hope amid volatile markets 

The opposite price movements on the London and New York coffee exchanges are perhaps the biggest surprise. The price of Robusta coffee in London rose by US$37 per ton, or 1.73%, over the first six months of the harvest season, whereas the price of Arabica coffee in New York fell by US$885 per ton, or 19.13%.

The closing price of Robusta beans on March 31 was UD$2,173 per ton, up US$414 (or 23.54%) over the previous quarter in 2022. The price of Arabica inched up by US$68 per ton, or 1.86%, over the period.

Central banks have had little choice but to tighten monetary policy in response to soaring global inflation. The move is expected to ease inflation but it has also piled pressure on coffee prices on the derivatives market. Late in March, the Federal Reserve (Fed) of the U.S. raised its federal funds rate to 5% from near zero last March.

Yet, inflation in the Eurozone fell to 6.9% in March from 8.5% in February, while inflation in the U.S. dropped by 0.1 of a percentage point to 4.6% during the same period. Falling inflation would fuel market improvement, particularly in the U.S. and European Union (EU) member states, among the world’s largest coffee importers.

Market experts believed that any increases in interest rates would be within manageable limits. Fed policymakers just raised interest rates by 0.25 percentage point although the European Central Bank recently announced a 50-basis-point hike. As central banks have sought ways to loosen their monetary policy, commodity trading firms are seeing some hope amid volatile markets. In this regard, coffee is no exception.

Supply and demand factor or else

The question remains as to which factors influenced the performance of the coffee market in the first half of the crop year more: the credit crunch and the increases in interest rates, or the supply shortage and the decline in demand.

A futures contract on the coffee market involves standardized products that have been inspected by the exchange. Certified stocks, also known as certs, refer to coffee graded by qualified personnel and then stored in recognized facilities, ensuring that the coffee’s quality satisfies the contract’s requirements, according to DRWakefield, a London-based coffee business. Certified inventories have had a significant influence on coffee prices during the last several months.

Given market uncertainties, firms and financial investment funds have appeared to use cert stocks as a pricing instrument to achieve an edge over rivals. When companies want to increase the price, they may reduce coffee stocks, causing people to assume a short-term supply shortfall would occur. Because these stockpiles might be stored for years, the coffee status in the inventory could give some insight into the market supply and the futures price.

Though there have been many reports on coffee production, demand and supply in a particular nation or the world, questions have been raised regarding the reliability of the information. Some experts believe the supply is in surplus while others disagree. Risk and ambiguity have continued to impact market sentiment.

This year, Brazil’s coffee production is expected to reach 55-65 million bags, with each bag weighing 60 kilograms, and Vietnam’s output is 25-31 million bags. People who think there will be a supply shortage may expect prices to rise to US$2,500 per ton for Robusta coffee and US$5,732 per ton for Arabica beans, the record highs in 2022. In contrast, those who believe the globe is experiencing an oversupply could think that the Robusta price has peaked, staying at around US$2,200 per ton.

Coffee market in focus

The global Robusta coffee supply is likely to be significantly boosted in the coming months as the harvest season is at its peak in both Brazil and Indonesia. As a result, the US$2,500-per-ton coffee price predicted in the London market seems less feasible, especially considering Vietnam’s additional coffee inventory of 11.7 million bags.

For local businesses, the State Bank of Vietnam’s efforts to lower interest rates could serve as a catalyst for growth. The endeavor is sought to stimulate the economy by easing enterprises’ operational obstacles posed by the prolonged credit crunch.

Nevertheless, it is uncertain whether local exporters will become short sellers in light of the favored market trend. But as obtaining a loan has become less difficult, local companies may also afford to stock up on coffee beans. More or less, the supply and demand dynamics will continue to impact how a coffee firm realizes its profit potential in a volatile market.

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