According to meteorological forecasts from several countries, the likelihood of the El Nino weather phenomenon occurring is very high. However, coffee prices have not risen as expected and are currently hovering at low levels.
Adverse weather may support the prices of agricultural products, but sometimes weather information can turn into a trap, benefiting others rather than the farmers.
Prices Struggling for Direction
After a sharp drop, losing $38 per ton when it closed on June 3, the ICE Robusta futures market has been struggling, neither increasing nor decreasing, remaining stagnant at low levels. The market has started to shift from July delivery to September delivery, but prices last week remained between $1,910 and $1,920 per ton, the lowest in two months.
The domestic market remains relatively quiet. The price of raw coffee dipped to 37 million VND per ton, a decrease of 5 million VND from the peak of the season, set in mid-March 2014.
“Traditional coffee-consuming countries in the Northern Hemisphere are entering summer, and demand is usually low, so roasters are limiting their purchases,” said a representative from a Swiss importer with an office in Ho Chi Minh City. “Very few people are buying directly as they did before. There is also less coffee being put into storage because the prices aren’t matching.”
Robusta coffee of 2.5% defective beans is being offered at a discount of $30-40 per ton below the London benchmark, while buyers are paying about $70-80 per ton below the FOB price. However, “only those who are short on previously contracted goods are asking to buy, but their purchasing volume is just enough to cover their short sales,” said the representative.
The Impact of El Nino on Coffee Prices
Many people believe that the slight price increase last weekend was driven by the forecast of El Nino, a weather phenomenon causing floods in countries like Brazil and Colombia and droughts in countries like Indonesia and Vietnam, which is expected to reduce coffee production in affected areas.
Last week, the U.S. National Weather Service’s Climate Prediction Center raised the probability of El Nino occurring this summer from 65% to 70%, with the probability rising to 80% in the second half of the year.
In Vietnam, the meteorological agency also indicated that El Nino might return and could impact crops, including coffee in the Central Highlands and Southeast regions. “We’ve been waiting for the rain, but it hasn’t come yet. The plants need fertilizer, but it’s impossible to apply it,” said a farmer in Dak Lak Province.
If El Nino happens, its effect on crops will only be felt in the next growing season. Farmers aren’t excited about the phenomenon, as they know it may cause more harm than good. The immediate impact on prices is more of a speculative explanation by those who still have unsold stocks, hoping for a price hike. “If El Nino happens and prices increase immediately, we wouldn’t have any coffee left because we’ve already sold it all,” said Le Thanh Tam, a farmer in Di Linh, Lam Dong Province.
Those speculating and holding stocks, waiting for a price increase, are the ones hoping for El Nino to come to their rescue.
El Nino: A Waiting Game for Speculators
If this adverse weather phenomenon had been predicted earlier, when farmers still had stocks, the likelihood of holding their coffee to benefit from a price increase would have been much higher. The recent price drop over the past month suggests that farmers have already sold much of their stock, which has pressured the price downward.
From a market psychology perspective, the forecast of El Nino has led many to believe that the drought will reduce supply and push prices up. Conversely, many farmers, believing that prices will rise, may increase production at any cost. This increased investment leads to higher production costs, but if prices don’t increase as expected, farmers will bear the brunt of the loss.
Indeed, “don’t treat El Nino forecasts as the ultimate factor determining agricultural prices. If one side of the Pacific is dry, the other side with more rainfall could help Brazil and South American countries increase their supply,” commented a market analyst in Ho Chi Minh City.
Market reports suggest that stockpiles of Robusta held by trading companies or speculators are above 300,000 tons, scattered across domestic warehouses, bonded warehouses, and the ICE Liffe exchange. This stockpile will be a more important factor affecting coffee prices in the coming period than El Nino.