Coffee Market Firming Good for Southeast Asian Growers
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Two weeks ago Vietnamese farmers were selling their robusta beans for July delivery into the market at $35-50 per ton discount to the spot futures price. By the end of last week that discount had vanished and they were seeing premiums of $10 per ton. Looking at the chart there was a clear breakout above $2050 per tonne and prices ran directly to $2170. A break of the December high would be very bullish for a market whose demand is under pressure from the mess in Europe.
Robusta, the easier-to-grow but more bitter variety used in instant coffee and espresso brands like Café Bustelo, has been in a structural bull market going on 12 years now. Prices have risen nearly 500% since 2001 making robusta almost as good an investment as gold over that same time period.
There are very few pure coffee plays out there for American investors. One option is the Dow Jones-UBS Coffee ETN (NYSEMKT: JO). Being an ETN, though, while the price is tied to the global price of coffee, being a debt instrument or derivative, it is subject to other factors like the shape of the futures curve. Starbucks (NASDAQ: SBUX) primarily serves the milder, lower caffeine and more expensive Arabica.
Arabica prices have fallen so much that they have put serious pressure on Robusta prices as substitution effects have taken over which has put a lid on short-term prices. The spread between them is currently less than $0.80 looking at current data with Arabica prices having carved out a range between $1.72 and $1.86 per pound on the NY futures chart.
The Robusta market however, remains tight even with a record harvest in Vietnam, as Asian tastes are more attuned to Robusta at this point due the overwhelming preponderance of Robusta locally. Both markets are in mild contango right now with supply and demand forces getting mixed signals from producers and the shaky global macro environment thanks to Europe. Not to mention that the U.S. Vietnamese exports to Europe have been slow.
Vietnamese Coffee
Vietnam is the biggest exporter of Robusta coffee in the world, the biggest producer of “bad coffee,” as the saying goes. 97% of Vietnam’s coffee exports are Robusta. While Arabica exports have grown rapidly in the past few years, there are not many places in Vietnam’s mountains suitable to growing Arabica.
Anticipating very high demand in the second half of the year, Vietnam’s coffee farmers have been withholding supply from the market refusing to sell at less than $1.92 per kilo or $1920 per tonne according to reports from local sources. It looks like we may have hit that supply constraint limit. Local demand from Indonesian roasters has pushed prices there to $110 per tonne over the NY Liffe spot price last week.
Coffee consumption in emerging markets is growing faster than the world consumption which should keep the market in supply constraint and hence a structural bull market for a long time. Vietnamese consumption is growing at a 9-11% pace and far above the 2% growth rate globally. This is why Masan Group purchased a controlling stake in Vinacafe last fall. Masan is a consumer focused conglomerate that is invested heavily across industries which will benefit from a rapidly evolving young middle class here in Vietnam.
Current production estimates are a supply deficit of at least 5 million 60 kilogram bags based on consumption statistics that are nearly 18 months out of date. This is part of the reason why Starbucks is accelerating their plans to locally source coffee in Yunnan province while also educating farmers on improving their yields. While their strategy in China is to saturate the high density urban markets, as opposed to McDonald’s more pervasive growth plan and their lower priced coffee drinks. Starbucks is pursing the middle to upper middle class market in China.
The cross-currents in the coffee markets may create short-term shocks to the futures price but the fundamentals of the market remain strong. If consumption in the West drops, Arabica prices will stay under pressure due to over-supply but until local tastes change and are coupled with much higher disposable incomes, robusta demand should continue to be very strong.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services recommend Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
