James Dargan, Head of Sucafina APAC, explains how farmers are reshaping supply chains, leading to exponential shifts in the price of Robusta coffee on the global market.

Recent headlines have highlighted the high prices of Vietnamese coffee, in particular the Robusta crop which is 96% of the production.

Vietnam is the world’s largest producer of Robusta (26-29M bags of 60kg), followed closely by Brazil (20-24M bags) and then Indonesia (9-11M bags). Robusta is normally a cheaper coffee than Arabica and has a more harsh and bitter taste, but it is also denser and has double the caffeine content.

For reference, Robusta is traded on the London exchange in $/ton, while Arabica is traded on the New York exchange in cents/lb. The London exchange is at a multi-decade high right now – at around $3,300/MT versus an average that would normally be below $2,000. In Vietnam, the current price per kilo is approximately 95,000VND and the average cost of production is 30,000VND, representing a great financial return for producers. Despite this 300% return, producers are still holding onto inventory, anticipating even higher profits.

How did we get here? In commodity trading, we historically look at a few indicators to determine price movement: supply and demand; certified stocks in warehouses; the price of the terminal market; premium above or below the terminal market; the difference between Arabica and Robusta prices; and the spread between delivery months. Globally, demand is subdued, stocks are low but not critically low, the terminal is high, and the spread is inverted. All these traditional signs indicate producers should sell quickly, and that the market will “correct” itself, returning to historical averages.

The first missing ingredient from this recipe of price prediction is understanding producer intent and rationale. Collectors in the farming communities observed the soaring prices and sold short, anticipating that farmers would sell once the crop was harvested. However, to their surprise, producers withheld, causing the internal market to soar even higher. These collectors and traders went on to sell more coffee to other buyers (without fulfilling the original contracts) in an attempt to balance out their positions. Yet, farmer behavior continued to confound expectations as they remained steadfast in withholding their sales. This is a case of collective action defying the conventional fundamentals of stock pricing. 

Another critical component missing from the equation is the assessment of domestic and regional demand for Vietnamese coffee. Obtaining precise data on consumption proves challenging, but an informal observation suggests that demand isn’t waning. Additionally, transportation costs and regional tariffs render Brazil a less appealing option within the region. The quality and presence of agrochemical residues commonly found in Brazilian Robusta also diminish its attractiveness, particularly for European buyers. Nevertheless, despite these factors, we’ve begun witnessing imports of Brazilian coffee into the region due to the significant price differential. 

Producers have finally gained a stronger voice in the supply chain, prompting traders in distant, shiny offices to reconsider presumptions about farmers’ actions. 

Going forward, traders will reassess their relationships within the supply chain, prioritizing transactions with dependable suppliers. Roasters, who have traditionally relied on Vietnam for its affordability and reliability, will reevaluate their sourcing strategies and seek to diversify their supply chains. This shift may prompt everyone, from middlemen to roasters, to incorporate more low-grade Arabica, which occurs on every tree due to broken beans, insect damage, poor processing, etc. This low quality coffee is currently cheaper than Robusta, but has less caffeine and lower-density. Consequently, roasters might compromise on overall blend quality to maintain reasonable prices for consumers. In the long term, roasters and soluble producers will need to enhance their extraction efficiency, leveraging new technologies that promise significant improvements in quality and yield. 

With producers exerting greater influence in the supply chain and market dynamics undergoing significant shifts, consumers should brace themselves for sustained higher prices in the coffee market, signaling that cheaper cups of coffee may remain a distant dream.

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Tim Burrill
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