Neumann sees tighter supply after surplus of 6.9 million bags
CEO anticipates a stronger market for coffee futures next yearBy Isis Almeida
(Bloomberg) -- The world’s largest coffee trader is expecting prices to rise next year as supplies tighten, but all of that depends on how pandemic-hit demand recovers from the “imponderables” of the coronavirus.
In a rare interview, Neumann Kaffee Gruppe’s Chief Executive Officer David Neumann said the fate of the coffee market relied on easing of restrictions that shut down coffee shops from Paris to Los Angeles and cut consumption for the first time in more than two decades. Demand is set to rise 0.9% in the current season after contracting 1.3% in the prior period, the trader forecasts.
A rebound in consumption would come just as output in top grower Brazil is set to decline sharply. Arabica trees, which produce the milder beans favored by Starbucks Corp., are entering the lower-yielding half of a two-year cycle and dry weather is curbing the development of next year’s crop. That will tighten supplies after a surplus of 6.9 million bags this season, Neumann estimates.
“I would tend to expect a stronger C market next year, at least in the second half of the year,” Neumann said, referring to New York futures. “The imponderable here is corona. Do shops open again? Does consumption go up? Do people travel and all that? Honestly, I have no answer to that.”
People are drinking more coffee at home in Europe and North America, which account for just over half of global consumption. While that wasn’t enough to offset the closure of restaurants, coffee shops and offices, consumption has held relatively well compared with other consumer goods, he said.
“I think coffee has everything in it to be a winner out of a crisis because it is a comforting, consoling product, it’s an affordable luxury,” he said.
Coffee prices faced a wild ride this year, plunging about 27% from March to June after lockdowns were first announced. Futures later rebounded as consumers stocked up due to worries the virus would disrupt supply chains. Now prices are rallying again as dryness hurts the crop in Brazil, where arabica output will be “several million bags” below the 38 million of the last two off-cycle years, said Ana Wilks, Neumann’s head of research.
“Despite the much better rainfall pattern over the last 10 days in most arabica areas, there has definitely been some irreversible damage,” she said, adding that cherries were still developing and therefore Neumann won’t issue a forecast until it’s done a comprehensive survey of all producing areas.
Growth in global consumption will still be below normal, expanding just 0.5% in Europe and North America. In Asia, where coronavirus restrictions have eased, demand could return to historical growth levels, she said, adding that people in the region normally favor tea when drinking at home.
There’s still ample supply in the market. Brazil just harvested a crop of 70.1 million bags, the hurricane that hit Honduras affected mostly infrastructure, and Covid-19 restrictions haven’t severely disrupted coffee crops or field work in most growing nations, according to Neumann and Wilks. Consuming countries also rushed to buy early in the pandemic.
“Stocks seem to have built up in the first half of the year because people said: ‘I’ve got to get coffee to the destination,’ again because we don’t know how long the logistics chains will sustain themselves,” he said. “A lot of the larger and mid-sized industry went out and covered more than they usually would.”
While people drank more coffee at home, they didn’t downgrade to lower quality like during the financial crisis in 2009 when consumers were cash-strapped, Wilks said. This time, cash consumers saved from not buying their daily drink at a coffee shop has been spent on higher-quality product at the supermarket, she said.
“We have seen in our business in the last six months, surprisingly, the very high-end coffees have not been negatively affected,” Neumann said. “And the mainstream and economic coffees have done fine. It’s somewhere in the middle that these dents have come in.”
The coffee industry has been trying to cater to growing interest in single-origin, exotic coffees that can only be purchased in small quantities, and more consumers wanting to know where their beans come from and if they are grown ethically. Those trends are here to stay, according to Neumann, which traded almost 15 million bags of coffee last year and is present in 26 countries.
The trader, known as a traditional and private player in the industry, is in the midst of organizing its sustainability efforts under one division, he said.
“It’s not an issue of making it sexier for the end consumer -- that’s being done -- it’s a degree of making it viable for the producer,” Neumann said, adding that his company publicized its efforts less than its rivals. “What we are learning now, and it’s not a lesson that we enjoy, is that we have to talk about these things more.”
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