Emerging Markets Rout Serves Coffee Producers a Cold Cuppa

By Anonymous

Prices for coffee futures have fallen to their lowest level in more than a decade, highlighting how a recent rout in emerging markets is rattling global trade.

Arabica coffee futures have lost 23% so far this year, dropping below $1 a pound early this week, the lowest level since 2006. The declines were sparked by surging production and a sharp decline in the Brazilian real, which is encouraging exports from the world’s largest coffee producer as prices there remain stable in local currency terms.

That has dealt a blow to other major producers of the mild arabica bean, including Colombia and Honduras. Coffee prices there are down more than 20% in local currency terms, even as citizens are enjoying a relatively stable exchange rate, because small exporters can be vulnerable to swings in the currency markets of larger producers.

The price of a morning latte, however, is unlikely to fall as far, since such declines rarely trickle down to consumers, analysts said.. Prices for single cup coffee are down 4% so far in 2018, Rabobank said, and roast and ground coffee prices have fallen 1%.

At the same time, Starbucks Corp.’s third quarter revenues reached a record $6.3 billion, the company said in July, an 11% increase year-over-year, thanks in part to higher per-cup prices in the U.S. Shares have gained roughly 10% this quarter, though they remain down 6.3% for the year.

The fall in coffee futures comes as investors have punished the currencies of countries deemed most vulnerable to rising U.S. interest rates and a resurgence in the dollar. Dollar strength is a danger for some countries because it weakens their currencies and makes it more difficult to service dollar-denominated debt, while higher U.S. rates make riskier assets relatively less attractive.

In Brazil, where producers sell coffee in dollars and convert those overseas sales into reais, coffee futures have dropped just 3% this year in local currency terms, due to a 20% selloff in the country’s currency versus the dollar.

The MSCI Brazil stock index has tumbled 23% this year and Brazilian bonds in the JPMorgan EMBI Global Diversified benchmark bond index are down 6.7%, yet the weaker currency has shielded coffee producers even as competitors in other, relatively stable countries suffer.

The breach of the $1 per pound on the futures exchange has prompted requests for measures to help farmers in Colombia and Honduras, for example, as prices there have fallen below the cost of production.

The two countries, “have not ‘benefited’ from the same devaluation of their currencies,” said Rodrigo Costa, director of trading at Comexim USA in New York.

During a similar emerging market rout in 2015, both Colombia and Brazil’s currencies fell sharply against the dollar, raising coffee prices in local currency terms even as dollar-priced coffee futures fell 24%.

Meanwhile, speculators are betting in record numbers that coffee prices will continue to decline as Brazilian farmers harvest what analysts are forecasting to be a record coffee crop.

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Write to Julie Wernau at [email protected]