Global Coffee Trade Grinds to a Halt Amid Brutal Price Hikes

The global coffee industry is experiencing a turbulent time as coffee traders and roasters cut back their purchases in response to skyrocketing prices, a trend that suppliers have yet to convince retail stores to accept. The sharp increase in prices, particularly for Arabica coffee, has left many players in the industry reeling.

At the U.S. National Coffee Association's annual convention in Houston this week, attendees expressed shock over a 70% increase in Arabica coffee futures since November. These futures, traded on the ICE exchange, serve as the global benchmark for coffee transactions.

Renan Chueiri, the director general at Ecuador's ELCAFE C.A., revealed that for the first time, the instant coffee maker had failed to sell all its expected annual production by March. "We would usually be sold out by now, but so far we have sold less than 30% of our production," Chueiri said. He attributed this to the steep price hikes, which have strained clients' cash flow, making it difficult for them to purchase the coffee they need.

The surge in coffee prices has primarily been driven by a reduction in production from major coffee-growing regions, with Brazil—one of the world's largest producers—suffering significant declines in output. This has resulted in a decreased availability of coffee beans, leading to the current price surge.

According to one anonymous coffee broker, the industry is in a state of heightened caution. "Nobody wants to be exposed, nobody is buying for future delivery; it’s all hand-to-mouth," he said, referencing the practice of purchasing only what is necessary for immediate use and avoiding stockpiling. This approach has characterized many recent deals in Brazil, where brokers now close deals with a tight timeline. "You close a deal, and then you have seven days to go to the farm or warehouse and get your coffee. You check the quality, and if it's okay, you make the payment on-site and drive away with the coffee."

This cautious trading approach has also contributed to significant volatility in the broader financial markets. On Thursday, trade jitters sent U.S. stocks into a tailspin, with the Dow dropping 1%, the S&P 500 losing nearly 1.8%, and the Nasdaq falling 2.6%, officially entering correction territory.

While there are hopes for a potential price drop in the coming months, the situation remains uncertain. A recent Reuters poll predicts that Arabica coffee prices could fall by 30% by the end of the year. This forecast is based on the expectation that high prices will eventually dampen demand and early indications point to a bumper crop from Brazil next year. However, until prices significantly decrease, many coffee industry stakeholders are facing immense challenges.

A CEO of a major U.S. roaster, speaking anonymously, shared that some of his clients are struggling to stay afloat amid the high prices. "They don’t know if they will be able to sell their product at the new prices," he said. "Some people are going down." Supermarkets and grocery stores, he explained, have been pushing back against the price increases requested by roasters, resulting in prolonged negotiations. Some retail outlets are even experiencing shortages of coffee on store shelves, exacerbating the already dire situation.

The disruption extends to the logistics side of the coffee supply chain as well. Coffee warehouses near U.S. ports, which typically receive beans from Central and South America, are operating at only half of their usual capacity. An executive from one of the largest coffee storage companies noted that some firms are returning silos to their owners and canceling leasing contracts prematurely, signaling the strain the industry is under.

Industry experts predict that the market, especially in the trading sector, could face consolidation in the near future. Michael Von Luehrte, owner of the broker MVLcoffee, suggested that companies with greater capital would likely be able to increase their trading volumes, while smaller players might struggle due to reduced financing options.

However, not all industry trends point to continuing challenges. Louis Dreyfus, a major commodities trader, noted during a conference presentation that coffee-growing areas are expanding in response to high prices. Countries such as India, Uganda, Ethiopia, and Brazil are increasing their planted coffee areas. Dreyfus anticipates that if Brazil experiences a strong crop next year, combined with these newly expanded planting regions, coffee prices could eventually collapse.

The coffee industry's future remains highly uncertain as it faces multiple challenges from supply chain disruptions, price volatility, and shifting demand dynamics. For now, the industry is in a state of cautious optimism, hoping that a resolution to the current price surge will emerge in the coming months.