The global coffee market is segmented by product type (whole bean, ground coffee, instant coffee, coffee capsules and capsules); Distribution channel (in trade and out of trade); and Geography (North America, Europe, Asia Pacific, South America, Middle East and Africa). The demand for coffee is projected to rise at a rate of 9.60% from 2023 to 2028.
Adding here average inflation expectation of around 4.5% annually, it’s reasonable to expect average Coffee futures price growth to the tune of 14% p.a. Coffee and tea are considered as the most popular beverage after water which is likely to serve as a factor in the forecast period for the coffee market. The global coffee market is forecast to grow at a CAGR of 4.28% during the period between 2023 and 2027 – meaning it is only capable of meeting about a half of the growing demand. The latter strongly suggests additional momentum for coffee prices, in excess of the above-mentioned 14%. Indeed, the USDA, in its bi-annual report released on December 23, cut its global 2022/23 coffee production estimate by -1.3% to 172.8 mln bags from a June estimate of 175.0 mln bags.
As of the latest readings, March Arabica Coffee (KCH23) was up +3% yesterday, on February 21, and March Robusta Coffee was up +0.8%. Thus, coffee prices extended last week's rally to a 4-month high and edged higher.
Coffee prices are gaining support as recent heavy rains in Minas Gerais, Brazil's largest Arabica-growing region, have kept farmers off their fields and delayed the application of fertilizers and pesticides. Heavy rains have also led to increased coffee rust on some trees, which may also reduce coffee yields. Somar Meteorologia reported last Monday that the Brazilian state of Minas Gerais received 63.4 millimeters of rainfall in the week ending February 12, 126% of the historical average. Minas Gerais accounts for about 30% of Brazil's Arabica coffee production.
Signs of tightening U.S. coffee supplies also pushed prices higher. The Green Coffee Association reported last Wednesday that U.S. green coffee stocks fell -1.8% month-on-month in January to 6.265 million bags. Stockpiles of ICE (NYSE:ICE) Arabica coffee also fell to a 6-week low of 832,230 bags.
Robusta obtained some sort of shaky support after coffee trader Volcafe forecasted that the global 2023/24 Robusta coffee market would see a record deficit of 5.6 mln bags as Indonesia, the world's third-largest Robusta producer is expected to see its 2023/24 Robusta coffee production fall to 9.1 mln bags, the smallest Robusta crop in 10 years due to damage from excessive rainfall across its growing regions.
There is only one bearish factor for Arabica coffee – namely, it’s the recovery in ICE Arabica coffee inventories. Since falling to a 23-year low of 382,695 bags on November 3, ICE Arabica coffee inventories rose to a 7-1/4 month high of 891,933 bags as of February 8 (the last available reading).
Summary
The USDA, in its bi-annual report released on December 23, cut its global 2022/23 coffee production estimate by -1.3% to 172.8 mln bags from a June estimate of 175.0 mln bags. In addition, the USDA cut its 2022/23 global coffee ending stocks estimate by -1.7% to 34.1 mln bags from a June estimate of 34.7 mln bags. Meanwhile, the USDA's Foreign Agriculture Service (FAS) on November 22 cut its Brazil 2022/23 coffee production forecast by -2.6% to 62.6 mln bags from a prior estimate of 64.3 mln bags. This year was supposed to be the higher-yielding year of Brazil's biennial coffee crop, but coffee output this year was slashed by drought. By contrast, Conab on January 19 forecasted the 2022/23 Brazil Arabica crop would increase +14.4% to 37.4 mln bags.
Therefore, we see quite a sharp turnaround of general coffee crop forecasts as compared to our previous coffee report dated February 9. This would mean now is the proper time to have a closer look at this highly visible soft commodity.