Arabica bean rush

2014-03-09 14:00

Coffee futures outstrip the rise in general commodities, raising a scary spectre for regular caffeine fiends, writes Moyagabo Maake

Coffee addicts, at least those fond of the Arabica bean, can expect to pay more for their morning kick this year, as the price of coffee futures has risen steeply over the past two months.

The Economist magazine’s all-items commodity index shows that between December 31 2013 and the last week of February, prices for coffee beans rose 45% – far outpacing the increase in the price of natural gas, which rose 20%. The price rose exponentially higher than other commodities, including gold, silver, cocoa, soya and sugar.

According to the Business Insider website, coffee is the second most traded commodity in the world after crude oil and ahead of other commodities like natural gas, gold, Brent oil, sugar and maize. It is also critically important to developing countries, which account for 90% of the world’s coffee production.

On IntercontinentalExchange, a network for regulated exchanges in the financial and commodity markets, the price of Arabica for March delivery increased 58% during the same period, settling at about $1.76 a pound. This price is reflected instantly – in rands – on the JSE’s SA Futures Exchange (Safex), according to Johan du Toit, a trader on Rand Merchant Bank’s commodities desk.

He believes the reason for the steep hike can be found in Brazil, which produces most of the world’s coffee.

“[The hike is] principally due to coffee-producing regions in Brazil being hit by the worst drought in decades,” he said.

“The loss to the Arabica harvest is estimated at around 45%, while the overall crop damage – Robusta and Arabica – is expected to be around 15%.”

Du Toit said it was important to note that prices for Robusta, which has a higher caffeine content and is more bitter than Arabica, had been less affected, with only a 30% increase in the year to date.

It is difficult to gauge the effect this would have on coffee importers. Another commodities trader, who preferred to be anonymous as he was not authorised to speak to the media, said importers’ purchasing cycles could play a major role in the price passed on to consumers.

National Brands, a subsidiary of the listed fast-moving consumer goods group AVI, holds a 41% share of the fresh coffee market in South Africa, according to Euromonitor International, a market research company. Sarah-Anne Orphanides, the managing director of group company Entyce Beverages, said the higher market price had not yet filtered through to the retail price of its House of Coffee brands.

“All coffee roasters have to secure their coffee contracts well in advance,” she said.

“In addition, as our costs are composed of a variety of inputs over and above the coffee alone – electricity, petrol, e-tolls and the exchange rate, which have all come under pressure in recent months – there is not a simple linear correlation between the retail prices of our products on the shelf and the current coffee prices on the commodity exchange.”

According to Du Toit, local retailers “might have significant stock levels at the previous year’s prices that they would be willing to sell at the still-reduced levels”.

Almost every bag of coffee on retailers’ shelves announces “100% Arabica”. Likewise for the Bean There Coffee Company, a Joburg roastery which also doubles up as a coffee shop.

Its operations director, Sarah Robinson, said Bean There was lucky – for now – as it had already clinched contracts for the beans it imports from elsewhere in Africa and roasts locally.

“We’ll probably have to relook at our pricing in the middle of the year,” she said.

Ethiopian coffee, Bean There’s most popular at R65 per 250g bag, would most probably see an 8% increase in its price, well below the rate at which the price to be paid to producers has increased.

Robinson said customers would mind if Bean There raised prices that high, but added the market price was so volatile it would not make sense to increase and decrease the retail price to match each of the ups and downs.

In this way, Bean There would absorb the extra cost – which would reduce profit margins – but would hopefully recoup some of the losses when the market price goes down.

But will prices stabilise soon?

According to Robinson, it depends “on the Brazil harvest”. She added: “If it’s good, the price may go down.”

Du Toit said it’s difficult to say when the Safex price would stabilise. “Coffee supply is a lot less flexible than grains, for example, since trees generally take about five years to mature. Thus, there is a long supply response delay.

“What will probably happen is that blenders will switch to higher Robusta ratios, while more niche Arabica-rich coffees will remain more expensive for at least the next year.”

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