- In 2021, a severe frost in Brazil caused coffee prices to skyrocket, eventually breaking the $2 mark
- However, some believe that improved weather forecasting could stabilise coffee prices
- But weather predictions are just one of the factors that influence a coffee’s price
EXTREME WEATHER events and changing climate conditions are among the most significant influences on a coffee’s price. This means that for traders, monitoring weather forecasts in major coffee-producing countries is important.
Poor weather conditions can significantly impact global coffee harvests, in turn affecting global prices. In July 2021, a severe frost swept many producing regions in Brazil, the world’s largest coffee-producing country. This contributed to a 60% increase in the cost of green coffee.
The cost of freight during the Covid-19 pandemic was another factor, but nonetheless, the frost in Brazil heightened industry concerns about how climate change could affect pricing in the future.
Coffee plants grow in the Bean Belt – an equatorial band which spans the extent of the world where the seasons are wet and dry rather than hot and cold. This means that temperatures are more consistent year-round. As such, any dramatic increases or decreases can be devastating.
Furthermore, widespread temperature rises and drought are already reducing the amount of land available for the production of arabica coffee, which requires cooler temperatures and high elevations. Additionally, higher temperatures and erratic rainfall patterns accelerate the spread of coffee leaf rust – a crop disease which lowers yields and eventually kills coffee plants.
Currently, precipitation deficits, above-average temperatures, and recurring heatwaves have led to one of South America’s worst droughts in decades.
This could just be the beginning. According to the World Meteorological Organization, there is an increasing likelihood El Niño will occur this year.
El Niño is a phenomenon caused by ocean temperature variations in the equatorial Pacific. Its impacts are strongly felt in Latin America, affecting air temperatures and rainfall patterns – and therefore coffee production.
When it has previously occurred, El Niño has had a severe impact on local economies, causing agricultural devastation, droughts and famine. It is expected to affect major coffee-producing countries, such as Vietnam and Indonesia. Brazil and Colombia may also be affected.
Leveraging data
The price of coffee is speculative. It fluctuates in response to anticipated risks and opportunities. If certain weather is predicted to impact a harvest, this has a dramatic effect on coffee production, and subsequently affects the C price.
Greater price volatility as a result of increasingly unpredictable weather patterns is worsening the situation for many smallholder coffee farmers who are already financially vulnerable.
However, technological advancements are generating opportunities for improved weather forecasting. The insurance sector is already witnessing this. Companies like Igloo are leveraging data to create a more robust weather index, which improves coverage for much of the world’s coffee-producing regions.
These advancements have the potential to bring greater stability to coffee prices.
“We’re currently making huge leaps in our ability to assimilate higher volumes of data and compute them into modelling and forecasting systems,” says Gregory Oddo, a weather strategist at Sucafina. “This helps provide a more complete picture of the atmosphere, and use it to predict what happens next more and more accurately.”
Improved weather forecasting holds the promise of improving price stability, considering its significant influence on agricultural yields. However, while forecasting advancements are valuable, it is crucial to acknowledge that the actual impact of weather events remains more influential than their prediction.
“The forecast is part of the equation for price action at a given time, but it’s just one part of it,” says Greg. “The real impact happens after the weather change has been observed. This is what will impact the supply and demand of coffee.
“Yes, you can forecast it and help people prepare – but you can’t stop a frost coming in Brazil.”
Greg also highlights the potential downside of improved forecasting accuracy. While more precise predictions can be beneficial, any deviation between the forecasted and actual weather conditions could result in drastic market reactions and even greater price volatility.
The market’s pricing strategy reflects the risks of extreme weather events – including the probability of their occurrence and the potential for prediction errors.
Ultimately, improved weather forecasting can only go so far in bringing price stability. It allows stakeholders time to react and prepare – giving buyers the opportunity to secure their supply streams, plan contingencies, and try to assess the potential impact on prices. Similarly, farmers can invest in climate adaptation measures to the best of their ability.
However, weather forecasting alone cannot eliminate the inherent risks associated with how climate affects the price of coffee.
Not the only factor
Additionally, a number of other factors contribute to the market’s volatile price – weather is just one of them.
Foreign exchange rates and shipping and container costs impact coffee’s price. Coffee stocks also have a considerable impact. Countries store coffee to act as a buffer against supply shortages – for instance, when extreme weather events occur.
Coffee stocks shape the dynamics between supply and demand and are therefore key determining factors for coffee pricing.
Stock transparency is arguably a factor for price stability. The recent announcement that the Green Coffee Association (GCA) will no longer publish its assessments regarding the level of green coffee stocks in the US presents a more immediate threat to coffee price stability than extreme weather patterns, some argue.
“For a fully functioning market, you need information to reduce volatility,” says Neil Rosser, a coffee researcher. “Warehouses not sharing how much stock they have is of immediate concern, not least because producers won’t know how much coffee to produce.”
According to Neil, bringing greater security to producers, providing greater access to liquidity, and establishing longer-term contracts will also help to stabilise coffee prices.
“You have to have a futures contract that people trust and has large amounts of liquidity,” he says. “If you can provide guarantees to avoid producers defaulting contracts, this could also help.”
The coffee sector has become riskier than ever due to climate risk, inflation, and the impending EU supply chain due diligence legislation. This means financing is less affordable and available than it ever has been in the coffee industry.
“Banks that have been involved so far are taking a step back because of the new rules,” says Neil. “The legislation has good intentions but will have unintended consequences, notably through the risk of non-compliance.”
The financier faces the risk of being held accountable for non-compliant lots, acting as a significant deterrent for investment. Broadly speaking, coffee production is currently viewed as being particularly risky, and this is affecting market prices.
“People have to be paid more to take that risk – so interest rates will go up and affect pricing,” says Neil.
There are clearly many factors which affect the volatility of coffee pricing. And while improved weather forecasting could stabilise prices to some extent, relying on it too heavily is not without its risks. At the same time, it could also help other stakeholders prepare for any extreme weather effects, however.
“Businesses try to control as many variables as possible,” says Greg. “You can’t control the weather, but you can control how you prepare for it.”
