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The bitter-sweet taste of coffee

Publication Date: 02 Oct 2018 - By Permjit Singh By Permjit Singh
Actionable
Differentiated

Macro Investment Strategies Commodity Consumer

Coffee growers are getting a roasting as they face the lowest price for their coffee beans in 12 years. Times are so tough they are calling on the support of coffee retailers to cover their costs of production, according to reports in the Financial Times.

Brazil is the world’s biggest producer and exporter. Its bumper harvest, combined with the Real’s depreciation, has driven the coffee price down. To pay for Brazilian coffee beans fewer US dollars are now exchanged to buy the same amount of Real (the currency of Brazil).  Unfortunately for Brazilian growers, that means it now takes under a $1 to buy a pound of coffee.

The cost of production is $1.20 in Colombia and and $1.50 in El Salvador. 

(Image sourced and reproduced from the Financial Times)

The Real has depreciated because of pessimism over fiscal reform and declining consumer confidence. Further, hedge funds have shorted the commodity as the Real has depreciated, so much so that net shorts (the difference between bullish and bearish bets) are at record highs.

Hedge funds’ short-selling strategy aims to take advantage of the close correlation of coffee prices (which are priced in $) and the exchange rate of the Real. Their strategy is to sell  coffee now and buy it back later - when its price has dropped thereby capturing the difference in prices as hedge funds’ profit. 

(Image sourced and reproduced from the Financial Times)

Not only have Brazilians exported more coffee, other leading producers such as India, have also produced more – adding further downward pressure on the price of coffee.

Nestle gave a non-committal response to the desperate plight of farmers: “We welcome and look forward to continued interaction with the World Coffee Producers Forum”.  

“This is the worst time to be a coffee farmer.” said Andrea Olivar, global manager of coffee at Solidaridad, a Dutch NGO. On the other hand, it could be the best time to be a commodities trader. The contrast in fortunes echoes sentiments in Charles Dickens’ novel: A Tale of Two Cities: “it was the worst of times; it was the best of times”.

 

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