Drought in Brazil to send 'structural deficit' arabica
Global Arabica deficit in 2021-22 is 0 largest in two decades
Manisha Jha and Marvin G. Perez
(Bloomberg) -The global shortage of Arabica coffee, which is expected to be the biggest in at least two decades, may persist beyond the next season, after a drought devastated the harvests in Brazil, according to one of the biggest traders of the commodity.
Signs that demand is recovering as economies emerge from the pandemic mean that it may take years for supply to keep up with demand after the drop in production in Singapore, based in Singapore Olam International says. The South American country is the largest producer of Arabica beans, the type preferred by Starbucks Corp.
The prospect comes with the rise in coffee prices, with major brokerage firms, including Switzerland's Volcafe Ltd. and Neumann Kaffee Gruppe from Hamburg predicting a large supply deficit. Arabica futures jumped more than a third last year, and the premium on the cheapest robust coffee used to make instant drinks is the highest since 2015. Olam said the tight market could continue to sustain gains, even when Arabicas enter the higher market. yielding half a two-year cycle in the 2022-23 season.
"Assuming that the demand for coffee recovers pre-pandemic levels, the biggest upward factor for us is that even a 'connected' year in Brazil in 2022-23 will not be enough to make up for the deficit of the previous year". Vivek Verma, CEO of Olam Coffee, said in an interview. "We see the market entering a structural deficit in the next three years, which will be more optimistic in the long run."
For the 2021-22 season, which begins in October in most countries, global production will fall behind demand by 8 million bags, against a surplus of about 5 million in the current season, Olam said. Arabica will have a deficit of 11 million bags, the largest in data dating back to two decades, while the supply of robusta will be in surplus.
The trader estimates that the Brazilian harvest that typically begins in May at around 35.5 million bags of arabica and 22 million bags of robusta, known as conillon in Brazil. This compares to a total of around 71 million during the year of highest productivity of the country's biennial crop cycle in 2020-21.
The coffee supply situation may also spark renewed interest on the part of hedge fund managers, many of whom have recently turned their attention to the booming grain markets, said Verma.
On the demand side, Europe and Japan lagged behind in the recovery, mainly because the out-of-home market plays a bigger role there and coffees in some regions are slow to open, said Verma. In the US, retail sales made up for most of the losses in sales away from home, he said. Olam expects global consumption to advance 0.6% in 2020-21, after falling at approximately the same rate as the previous year.
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