ICO: Coffee Market Rallies Briefly, But Downward Trend Continues

Nov. 12, 2015

Despite a slight jump in coffee prices at the beginning of October, these gains were short-lived as global commodity markets turned lower. Total exports for coffee year 2014/15 dropped for the first time in five years, but still reached the relatively high level of 110.7 million bags, the International Coffee Organization reported in its October 2015 Coffee Market Report. Looking ahead to the coming year, however, several major producing countries are facing potential production setbacks, putting a lot of pressure on the 2016/17 Brazilian crop.

Coffee prices started the month brightly as rains expected in Brazil failed to materialize, and concerns over the flowering for the 2016/17 crop grew. The daily price of the ICO composite indicator jumped from 114.80 cents/lb at the beginning of the month to a high of 125.08 on 14 October. However, as the Brazilian real again weakened against the US dollar and rains started to appear, the market reversed lower, dropping to a low of 113.48 cents. The monthly average settled on 118.43 cents, 4.7% higher than September, but the negative market trend observed over the last year still seems to prevail.

Furthermore, it is notable that coffee prices have recently followed a similar trajectory to global commodity prices, as shown below by the Standard & Poor GSCI commodity index. Much of this broader downward trend over the last year has been driven by concerns over slowing economic growth in China and the increasing likelihood of a US interest rate rise. It is important therefore to bear in mind that the fundamentals in supply and demand are not the only factors affecting the coffee market.

Looking at the group indicators, the three Arabica groups of Colombian Milds, Other Milds and Brazilian Naturals performed slightly better than Robustas, resulting in a widening in the arbitrage on the New York and London futures markets of 12.8%. Other Milds continue to trade at a premium to Colombians as monthly production levels in Colombia carry on increasing. Monthly price volatility in October was similar to last month, at 7.6%.

Total exports at the end of coffee year 2014/15 came to 110.7 million bags, 3.1% less than last year. This is the first year-on-year decrease in export volumes for five years. Shipments of both Arabicas and Robustas were lower, by 1.9% and 4.9% respectively, although an increase of 11.6% was recorded in the Colombian Milds group.

In terms of the major origins, exports from Brazil finished on 36.3 million bags, 1.8% more than 2013/14 and the largest volume from Brazil on record. Vietnam, on the other hand, saw severely restricted exports, down by 19.2% to an estimated 20 million bags. The ongoing recovery in Colombia resulted in an increase of 13.3% to 12.3 million bags, while Indonesia increased to an estimated 7.3 million bags and Honduras to 5 million bags. Our production estimate for 2014/15 has been revised slightly to 143.3 million bags, down 2.3% compared to last year. This revision is mostly due to an increase in production by Colombia, which is now estimated at 13.3 million bags. Looking ahead, however, a lack of rain resulting from El Niño could reduce production next year, with bad weather also potentially affecting production in Indonesia and Vietnam.