Read below an article taken from our FO Licht platform dated 07/04/20.

The coffee market has been defying overall weakness in commodities recently as arabica coffee futures have risen strongly in late March and even reached a 2-1/2-month high of 130.65¢/lb on March 26.

Subsequent technical liquidation and pressure from a drop of the Brazilian real to a new all-time low against the US dollar of 5.3229 have pushed prices to about 118¢/lb at the time of writing but this means that prices have still gained about a fifth from levels just below 1 USD/lb hit in early February. In comparison, WTI crude oil futures have collapsed from USD50 to USD20 per barrel during the same period even though they have now recovered somewhat to about USD27.

Coffee market has strong fundamentals

This has to be seen against the background that, fundamentally, the coffee market already had some bullish factors in the making when COVID-19 hit the markets, such as the fact that the world's largest supplier Brazil is running low on stocks ahead of the new harvest.

On top of this, there is now increasing worry over potential disruptions to shipments from some producing countries linked to the coronavirus pandemic, so roasters have been seeking to secure supplies and thereby shore up prices.

Among the main concerns are that

- there could be disruptions to port operations affecting coffee exports

- governments could restrict movement of seasonal workers that travel to farms.

As far as coffee is concerned, both factors are theoretical in nature FOR THE TIME BEING. But this does not mean that things will continue this way going forward. As a result, coffee importers in some of the largest consuming countries are stockpiling, bringing forward orders by up to a month to avoid shortages if supply chains are disrupted by coronavirus lockdowns.

Roasters stock up

Europe and the United States are short tens of thousands of freight containers, having received only a trickle from China during its coronavirus shutdown, while shippers are also struggling with quarantines at ports and crew shortages. Roasters and traders are therefore stocking up because they anticipate supply disruption.

The global pandemic has prompted governments around the world to impose severe restrictions on movement in a bid to stem the spread of the virus. Supply chains are backing up as air freight capacity plunges and companies struggle to find enough truck drivers and shipping crews.

Growers in major exporters Brazil and Colombia, among other countries, have therefore seen prices rise. While Colombia is currently between harvests, most exporters that still have stocks in the country have temporarily cut operational capacity. However, roasters are acting to speed up deliveries from other origins as well, such as Central America. This has contributed to strong differentials for mild arabica coffees in the physical market.

"We had requests from buyers in all major countries, US, Japan, Germany," said the head of one of the largest coffee exporters in Brazil. "Basically all the largest roasters in the world. They want to have the beans there quicker, just in case." Prices in Brazil are close to record levels in local terms as well, nearing BRL550 per 60-kg bag. Farmers there tend to sell when prices go above BRL500. Coffee exporters association Cecafe said shipments are normal for now, but it added that shipping lines have advised that container shortages might occur in the coming months, when Brazil could harvest its biggest crop ever. Meanwhile, a threatened vote over a strike by on-demand port workers in Santos, the largest port in Brazil, was called off two weeks ago.

Adding to roasters' concerns are reports that the virus could cause labour shortages that would hamper coffee harvesting in key regions such as Central and South America, where many coffee farms are yet to be mechanised.

"The (mitaca) harvest will start at the end of April, beginning of May, and what we have to be prepared for is the high probability that this confinement is extended beyond the 13th," said Roberto Velez, the head of Colombia's growers' federation. The Andean country started a 19-day national quarantine last week. Though farmers and their employers are exempt from quarantine measures, moving and housing some 150,000 workers in sanitary conditions will be difficult. So will ensuring beans are being processed and shipped, he added. "We have maybe one of the best prices in history," said Velez. "But with that price we're facing logistical problems, coronavirus, fear."

Vietnam and Central America are in the off-season

As far as the restrictions to the movement of seasonal workers are concerned, Vietnam and Central America are currently in the off-season and the next harvest is still several months away, while Brazil's (arabica) harvest that will get underway in coming weeks is not entirely, but to a large degree mechanized. In theory, this should temper fears to a certain degree, but market participants are not always paying attention to detail.

Coffee trading in Vietnam has been frozen last week as it began 15 days of social distancing from Wednesday to curb community transmission of the coronavirus. The Vietnamese government has told residents to stay at home, only going out to buy food or in emergency cases for two weeks from April 1. Trading activities, therefore, have been halted, traders said. "There will be no new deals struck in the next two weeks, at least. I don't know when things can be back to normal, maybe months," said a trader based in the Central Highlands, Vietnam's largest coffee-growing area. "Beans shipments will also be disrupted as very few workers are at the port right now."

On the other hand, coffee is a vital foreign exchange earner for many producing countries, so it can be expected that measures will be put in place to guarantee shipments and minimize shipping disruptions.

Global demand to be adversely affected

As far as demand is concerned, it is clear that coffee consumption of the habitual coffee drinker who needs a cup in the morning to get going will continue as before. However, there is also the occasional coffee drinker who only consumes an espresso after a business lunch or dining out, or the guys who meet in a coffee shop in Delhi to socialize and have a cup of coffee while hanging around together. Such consumption of coffee as a social beverage will surely be affected during times of social distancing, not least because the Starbucks' and Costa Coffee's of this world have been forced to close their shops in many countries.

That said, the coffee market has mainly reacted to supply side concerns so far and is probably underestimating demand losses. This will probably come into focus later on and so the further upside potential for coffee prices should be limited.

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This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.