Every year, when July arrives and the temperature in Brazil starts to drop as it enters the middle of winter, at least two places in the world heat up: the coffee market and our Y5Cafe forum. What’s happening on the other side of the globe may seem far, but it directly impacts every coffee farm in Vietnam.
In the past month, members of the Y5Cafe editorial board have received many questions from farmers and coffee traders, exchanged directly via Yahoo chat (YM). Most are interested in the coffee price trends: Will coffee prices go up (or down) in the coming months?
Honestly, if we could answer that question accurately, we would probably be cruising on a yacht and fishing on the Thames in London. As we have discussed in previous analyses, the coffee market depends on many factors like economics, weather, politics, natural disasters, and many countries that might not even know what a coffee bean looks like.
Because of this, we often advise our readers that they can only follow news to mitigate risks for business owners or choose an appropriate time to sell for coffee farmers.
We are very cautious with our answers, so we avoid making definitive statements. However, there are moments when we are confident about a “90% chance” and are eager to share that with our readers. If 10% of the situation turns out to be unfavorable, we just hope that our readers understand. Because “When someone confidently says the price will go up or down without providing reasoning, even if it turns out to be correct, the public will regard it as merely lucky guessing.”
What we present here is more of an exchange of experiences, not information, and we hope that readers will approach it with caution.
About two months ago, we discussed the phenomenon of the increased accumulation of coffee in London warehouses, ready for classification and sale. Furthermore, a significant amount of coffee was being bought and stored by foreign companies in Vietnam. At that time, we anticipated that there would be weather-related news from Brazil, which might cause frost, or at least light frost, prompting people to sell off their speculated stock. This is one of the coffee business methods based on weather patterns, which is worth studying, though not every company has the resources to follow it.
Not long ago, when we read about coffee overflowing in European warehouses, we witnessed some excessive reactions where people blamed the author for releasing information that caused coffee prices to plummet. To us, that was valuable information from someone experienced in the trade. The overflow was not caused by the author, but it pointed to the fact that goods were being prepared for sale.
At this time, when cold fronts are moving into Brazil, with Vietnamese exporters having little to no stock left, and Vietnamese farmers who are quite wealthy still holding some coffee, the price chart always inversely correlates with the temperature in Brazil, and they will sell to anyone who needs it.
In the past few weeks, we’ve noted that several export companies had to buy back coffee from foreign companies who had stored it, with the spot price (outright) ranging from $2,550–2,600/ton, FOB HCM. This is higher than the $2,490 closing price on June 28, 2011, of the Liffe market (which had risen by $114). To put it more simply, domestic prices = London prices + $150 (before June 28).
We would like to address the exaggerated reactions from some farmers when they see that the price has increased by $114, but the domestic market only bought it for an additional 800 VND/kg. Let’s try to calculate:
Using the Liffe closing price on June 28 of $2,490/ton, the average domestic price is 51,300 VND/kg for coffee:
$2,490/ton x 20,560 VND/USD = 51,194,400 VND/ton; rounding to 52,000 VND/kg.
Costs:
Packaging: 400 VND/kg.
Transportation: 400 VND/kg.
Processing: 150 VND/kg.
FOB delivery: 200 VND/kg.
Just these basic costs already make the total price for R2 shipment around 53,150 VND/kg, not including the bank’s interest and potential additional R1.
In other words, if the domestic price for coffee is 51,300 VND/kg, and the exporter sells it at the same price as London, they would lose about 700 VND/kg.
Furthermore, even if the global market price increases significantly, would the exporter dare to sell at that time and risk buying back at a higher price?
Returning to the business of coffee based on weather patterns, we hope we can more easily recognize some of the issues:
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July is the coldest time in Brazil and the hottest in London (depending on the year).
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The amount of coffee in Vietnam is considered depleted.
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The actual stock available for trade is not in the hands of Vietnamese exporters but in the hands of speculative companies storing it in Europe and Vietnam. Do you think they will wait until the winter is over, and Brazil completes its harvest before selling?
Historically, frost and droughts in Brazil have affected production:
Year – Impact
1902 (Late July/Early August) – Severe – Frost
1918 (June 24–26) – Severe – Frost
1942 (Late June/Early July) – Severe – Frost
1943 – Moderate – Frost
1953 (July 4–5) – Severe – Frost
1955 (July 30–August 1) – Severe – Frost
1957 – Severe – Frost
1962 (July 25–26) – Minor – Frost
1963 (August 5–6) – Moderate – Frost & Drought
1965 – Minor – Frost
1966 (August 6) – Severe – Frost
1967 (June 8) – Minor – Frost
1969 (July 9–10) – Moderate – Frost
1972 (July 8–9) – Moderate – Frost
1975 (July 17–19) – Very severe – Frost
1978 (August 13–16) – Moderate – Frost
1979 (June 1) – Moderate – Frost
1981 (July 20–22) – Severe – Frost
1984 (August 25) – Minor – Frost
1985 (August-November) – Minor – Drought
1988 – Minor – Frost
1994 (June 25–26 & July 9–10) – Severe/Very severe – Frost & Drought
1999 (August-November) – Severe (40% loss) – Drought
2000 (July 17) – Moderate – Frost
We believe that while we cannot create waves, we should ride them and steer the boat. We hope these insights will help farmers not only make decisions for this year but also in the years to come when it comes to the timing of their sales.