Brief (coffeeyo.com): This summer global coffee prices jumped again — New York arabica futures rose nearly 50% since June — as La Niña and El Niño whipsaw key growing regions, exposing how climate and commodity markets end up in your cup.
Source: Economic Daily. This summer, global coffee prices have risen again. New York arabica coffee futures climbed rapidly from June and have risen by nearly 50% at most so far; robusta coffee, an important raw material for instant and blended coffee, has also seen a noticeable price increase.
Yet at the end of last year, the market was permeated with a different mood. After several consecutive years of supply tightness, the industry widely believed that the world’s major coffee-producing regions would collectively welcome a bumper harvest year. Influenced by expectations of supply improvement, coffee prices once showed a downward trend.
However, the happy days lasted only a few days before La Niña and El Niño began to team up and “act up.”
At the beginning of this year, the equatorial Pacific was still under La Niña’s “control,” then its influence gradually weakened and turned neutral; by June, the U.S. National Oceanic and Atmospheric Administration found that the region had met the conditions for an El Niño event, and the latter was very likely to replace the former as the main climate feature for the coming months.
La Niña and El Niño can be simply understood as two climate anomalies triggered by temperature changes in the equatorial Pacific sea surface. Under La Niña, the sea-surface temperature in the central and eastern tropical Pacific is lower; the El Niño state is the opposite, with higher sea-surface temperature.
Don’t underestimate this small temperature change — its impact is global. Sea warming or cooling changes the direction of air flow above, and thus re-“distributes” global rainfall and heat. Places that should rain may become dry, relatively dry places may see continuous rain, and some regions may experience significant heat, drought or flooding. Moreover, the states of the two are not static, with a certain probability of mutual conversion. Influenced by atmospheric circulation and sea-temperature transmission, the “La Niña—neutral—El Niño” or reverse change process has occurred several times since the new century.
Coffee is especially sensitive to such climate change. Coffee trees have relatively high requirements for temperature and precipitation from flowering, fruit setting to fruit maturity.
This year, Brazil, the world’s largest coffee-producing region, encountered extreme-weather disturbances. In June, some coffee-producing regions that had already entered the harvest season saw increased rainfall, which at one point affected harvesting progress and brought considerable trouble to subsequent processing steps including sorting and roasting. Market analysts believe that as El Niño strengthens, some Brazilian regions may continue to face high temperatures and irregular rainfall later this year, directly affecting the early growth of the next coffee season. Brazilian coffee industry institutions warn that if extreme weather persists, coffee supply in the coming years will be affected.
Highly concentrated supply further amplifies the impact of weather on the coffee market. Brazil is the world’s largest coffee producer and also the largest arabica producer; neighboring Colombia and Peru are both important coffee origins. Vietnam is the world’s largest robusta producer, and nearby Malaysia and China are also major suppliers. Then there are major coffee-growing countries such as Kenya, Tanzania and Ethiopia, all not far apart. Even if only one major producing region encounters significant climate change, global coffee market supply will be severely affected.
In addition, the financial attributes of coffee beans are also a factor that cannot be ignored. Coffee is not only an agricultural product but also a mature global commodity. The arabica coffee futures traded on the New York market and the robusta coffee futures traded on the London market are important pricing benchmarks for international coffee trade.
Since futures markets trade the future and risk, all coffee traders closely watch producing-region weather. Information such as how long extreme heat in one region persists, or how much rain another region will get in the coming weeks, is quickly translated into output forecasts, and possible future supply changes are thus priced into current market prices in advance.
In such a situation, large coffee companies still have some hedging room — long-term procurement contracts, inventories and futures hedging can all smooth raw-material price fluctuations. Therefore, short-term futures volatility will not immediately and significantly show up in retail prices. But this buffer is time-limited. If high prices persist, original low-price contracts expire, newly purchased high-price coffee enters inventory, and costs will eventually show up in corporate financial reports. Nestlé, Starbucks and other coffee companies all mentioned in recently released financial reports that rising coffee raw-material prices are increasing cost pressure.
Thus, more and more coffee companies are beginning to extend their supply-chain management to the planting end. For example, Nestlé plans to invest more than 1 billion Swiss francs by 2030 to help coffee growers improve cultivation methods, with one focus being the promotion of higher-yield, more drought-resistant and more disease-resistant coffee varieties. Starbucks is also doing similar things, including testing new varieties and new agricultural technologies under different climate and cultivation conditions to improve the coffee supply chain’s adaptability to risks such as high temperatures.
In fact, far more than coffee is affected by abnormal climate; many global agricultural products face similar challenges. This also reminds us that climate change is affecting human life in increasingly obvious ways, and protecting the environment and enhancing agriculture’s climate-response capacity has become an urgent common issue for the world.
Source: Economic Daily.
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