By Natalie DeCoste
One of the worst frosts seen in two decades has hit Brazil’s coffee-growing region, and the impact is hitting global markets.
Last Thursday, coffee futures rose 10%, with prices posting their largest single-session gain since early 2014 and their highest settlement in more than six years. This means that futures for arabica beans are up to $2.08 a pound. During July, futures have climbed 30% and have nearly doubled over the last year.
The rising prices come from the recent frost in Brazil, which is the second weather shock in recent months to strike farmers in the country, the world’s biggest coffee producer. The first weather problem the country faced was a drought which knocked out the region’s 2021 crop.
“This marks the first time since 1994 that the country has experienced such a weather event,” coffee trader I & M Smith said in a market update.
If the drought continues, it has the potential to jeopardize Brazil’s 2022 crop. Should the next year’s crop take a hit, people like James Roemer, Weather Wealth newsletter author at commodity-trading adviser Bestweatherinc.com, believe that coffee prices have the potential to rise to $3.
Initial estimates released over the weekend from Conab, the Brazilian government’s food supply agency, said that last week’s frosts had impacted anywhere from 150,000 to 200,000 hectares of the arabica crop. This makes up roughly 11% of the country’s total arabica crop area.
“The extent of the damage is still unclear. However, estimates are now between 5.5 million and 9 million (60 kg) bags, up from 2 million to 3 million last week,” said Charles Sargeant, softs and agricultural commodity broker at Britannia Global Markets.
Between the drought, the frost, and shipping issues spurred by the pandemic, the coffee industry is in a precarious situation. There’s speculation of a high probability of having the lowest production levels during what is known as an “on year” for production, a year in which there is supposed to be a good crop yield.
However, because of the weather situation, Brazil’s coffee crop is facing and the high cost of transportation for crops brought on by the pandemic, the margin of error for future weather events impacting the coffee crop is essentially zero.
The coffee market is just one of a few commodity markets impacted by unusual or severe weather events. Lumber prices jumped up last week due to the forest fires raging through the West, which threatened a portion of U.S. wood supply. Floods in northwest Europe interfered with the flow of commodities and goods such as chemicals along the River Rhine, a major industrial thoroughfare. Meanwhile, extreme cold in Texas led to a spike in natural gas and power prices in February.
All of the commotion in the coffee-growing industry has left investors eager to see just how much of the higher prices companies can pass on to consumers. Those curious to see what some major coffee companies may do can tune into earnings reports for Starbucks after the market closes on Tuesday and Switzerland’s Nestlé SA on Thursday.
The global market is still months away from understanding the full scope of the damage brought on by the frost, but it is more than likely that America’s morning cup of coffee will get a bit pricier.