2021 has been the year of recovery. The almost sudden turnaround in demand has been a positive surprise that has, however, also had a noticeable impact on the prices of many commodities whose producers have been unable (or unwilling) to keep up with demand. Oil has risen about 60% in 2021 (with it gasoline), aluminum, copper and other metals almost 40%, while oil or beef is now 20% more expensive… However, none of those commodities is the one that has seen its price rise the most in 2021 in the futures markets. The great ‘winner’ of 2021 has been coffee and it has its why.
This has been the surprising result drawn from the review carried out by the US Energy Agency (EIA) on the behavior of the main raw materials. In a year that has been almost insurmountable for the prices of oil, gasoline, kerosene or gas, the EIA recognizes that coffee has not only slipped among the most bullish raw materials, but has become the king. Coffee futures have been the ones that have appreciated the most in 2021 in the S&P Goldman Sachs Commodity Index analyzed by the EIA with a revaluation that has exceeded 80%.
ING analysts published a note at the end of December in this regard in which they highlighted that “Coffee has had an explosive year due to the impact of the drought and frost in the Brazilian crop. Bottlenecks in the supply chain have also helped drive the market. There is a lot of uncertainty about the outlook for 2022; a lot will depend on rainfall during the Brazilian rainy season,” say these experts.
A long coming rally
Looking back, Arabica coffee futures have almost tripled since 2019. The price of Arabica coffee has gone from about $100 per 100-kilo bag (this is how Arabica coffee futures are analyzed), to touch the 300 dollars today (It is the price of pure coffee, without processes, transportation, or treatment… all of this makes it even more expensive in subsequent processes). The weather is largely behind these oscillations. Much more extreme and volatile conditions are reducing coffee production in the countries that dominate this market.
“The adverse weather throughout Brazil has had an impact on several crops, including corn and sugar. However, the impact on Arabica coffee has been significant and that has pushed prices to the highest levels since 2011,” they explain. ING analysts.
Brazil has struggled not only with frost this year, but also with drought, a kind of fatal combination for coffee production. “There is concern that large areas of crops have been damaged, which will have an impact on next season’s production. Similarly, the drought is also expected to affect the next harvest.”
The 2021/22 Brazilian coffee crop totaled 46.88 million bags (bags of 60 kg each), 25.7% less than the previous year. Undoubtedly, ING analysts insist again, that “the dry weather weighed down the harvest, and it was also the year with the lowest yield in the biennial cycle.”
With this context, ING and the organizations that represent coffee producers are betting that “in 2022, demand exceeds supply. This will be driven by a combination of greater growth in demand, together with a Brazilian harvest overwhelmed by frosts and possibly new droughts. However, much will depend on rainfall in the coming months. Some forecast a deficit of up to 7 million bags. The expectation of a deficit in 2021/22 and the uncertainty about how big this could be deficits suggest prices should remain well supported.
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