Did robusta and cacao drive arabica prices to an 18-month high?

coffee on rollercoaster
  • Arabica prices have reached as high as $2.39/lb this week – their highest levels since September 2022
  • Meanwhile, cacao and robusta have been trading at all-time highs, largely due to weather and crop issues in Côte d’Ivoire and Vietnam
  • Arabica prices are being affected by these phenomena because of wider commodity finance trends 

ARABICA COFFEE prices surged up to US $2.39 a pound this week, the highest level since September 2022 – sparking discussions about what is driving this upward trend. 

Other key commodities like cacao and robusta coffee are also experiencing significant price increases because of climate change effects, crop issues and associated commodity financing trends.

The price of coffee has spiked to new heights as Vietnam, the world’s largest producer of robusta, experiences an unusually hot and dry season that will affect next crops and prompt a sharp rise in coffee futures.

“The positive trend began back in early January when the market fluctuated within the range of US $1.75 – 1.95,” says Alonso Tomas, President of Altico Trading. “Prices surged around April 3rd, fuelling speculation enough to bring the market to its recent highs.”

The USDA’s Foreign Agriculture Service (FAS) projects that Brazil’s 2023/24 arabica production will climb by 12.8% year-on-year to 44.9 million bags, due to higher yields and increased planted acreage.  In Colombia, the world’s second-largest arabica producer, it will climb up by 7.5%.

“With a good harvest forecast for Brazil, Colombia and Peru, why do prices keep climbing?” says Angel Barrera, Coffee Director and Partner at Belco Green Coffee. “Clearly, the force driving prices up is not one of supply and demand.”

Investor speculation is what is driving arabica prices up right now, as they look at other commodity patterns and take an approach of rushing to the riskier bets – arabica being one of them.

Meanwhile, robusta and cacao prices are rallying as well 

Robusta and cacao prices are also on the rise, adding to the commodity price frenzy. 

Coffee and cacao are sensitive crops that require specific temperature, water and soil conditions. With more frequent heat waves, heavy rainfalls and droughts damaging harvests, supplies are dwindling against a background of growing global consumer demand.

In Vietnam, robusta coffee, commonly touted as the more “robust” and climate resilient variety compared to its arabica cousin, is having a hard time surviving extreme heat and droughts. Production in Vietnam is dwindling, leading to lower output and higher prices. 

In West Africa, where 70% of global cacao is produced, a similar story is unfolding. Côte d’Ivoire and Ghana are facing catastrophic harvests this season, with El Niño causing unseasonal heavy rainfalls alternating with strong heat waves. The International Cocoa Organization stated in its latest monthly report that global cacao supply is anticipated to decline by almost 11% in the year following 2022-23.

Côte d’Ivoire is the world’s largest cacao producer and concerns over political instability and supply chain disruptions there have contributed to price volatility. The uncertainty surrounding cacao production there has led to supply constraints, driving up prices globally. Cacao bean prices have increased by 166% and 189%, respectively, in the New York and London cacao bean futures markets.

But what do robusta and cacao production and prices have to do with arabica coffee prices? 

“The robusta rally is being driven by concerns about Vietnam’s upcoming 2024/25 production, and this is lending carryover support to the NY arabica futures,” says Alonso. 

The supply crunch in the robusta and cacao markets have exacerbated the overall commodity price rally, amplifying the effects of the global commodity surge. This impacts trends in finance and speculation, which has a knock-on effect across sectors. 

We’re looking at a ripple effect that amplifies existing price increases

Global prices surging for coffee and cacao raises questions over the long-term damage climate change could have on soft commodities.

The uncertainty surrounding crop yields and the growing impact of climate change on agricultural productivity are creating challenges for speculators and commodity finance. 

Investors are facing heightened risks and increased market volatility, prompting a reevaluation of investment strategies and risk management practices in the face of climate-related uncertainties.

The interconnected nature of global commodity markets means that price fluctuations in one sector, such as coffee or cacao, can have ripple effects across other commodities. This affects everything from the cost of a cup of coffee, to the financial markets. 

“The increase in cacao prices itself doesn’t impact coffee production in any way, but it does attract some interest to the overall soft commodity sector (coffee, cocoa, sugar),” says Alonso. “Inevitably, this has also helped motivate buyers to pay more for coffee futures.”

The surge in prices hits at a time when global inventories are low, and speculative trading is on the rise – further fuelling market volatility. Alonso explains that the arabica price spike helped spark a “technical rally that has fuelled algorithmic and hedge fund buying.”

In layman’s terms, this means that the increase in coffee prices is driven by automated trading programmes and large investment firms, rather than changes in supply and demand fundamentals or other economic factors. These market participants may be reacting to patterns in the coffee market or other signals, and are buying coffee contracts in large volumes, which pushes prices higher.

The recent rally in arabica coffee prices, driven by supply constraints and market speculation, is part of a broader trend of surging commodity prices influenced by climate change effects and crop uncertainty. 

The price increases in cacao and robusta markets further highlight the interconnected nature of global commodity markets and the challenges facing investors and speculators in navigating a volatile and unpredictable commodity landscape.

Coffee Intelligence

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