How important is coffee in your life? Are you just a one coffee a day person, or can you not function without an injection of caffeine in the morning? Or have you foregone the demon drink altogether and moved towards teas of various description? Coffee has become the absolute drink of choice for many of us, and plays an important part in our daily routines, without sometimes even noticing it. Our day in the office in punctuated by deliveries by Coffee Berry, Coffee Station or other shops, and trips downstairs to Prokopis, or Beans & Cups or wherever. The seasons move in tune to whether you want hot or cold coffee, and coffee is the excuse for a long chat with old friends, a hopefully long chat with new acquaintances, and the prop for many an informal business meeting. It could almost be said that our lives, almost without knowing it, are built on it.
Be prepared then for an increase in coffee prices. It is already going up, and will probably increase further in price in the coming months. There has been a small increase in my daily Americano from downstairs: not enough to stop me buying it, but enough to notice it. The cost of arabica beans have reached ten-year highs, and futures prices are almost double what they were at the beginning of the year.
The reasons are a little more complex than a lack of supply and an increase of demand. That there is an expected fall in supply is in no doubt. Brazil, the world’s largest exporter of coffee, says that expected coffee production for the Marketing Year 2021/22 (July-June) will be 19% less year on year, and exports will be 12.5 mill 60 kg bags less than the previous year. This is leading traders to turn to the futures market to secure deliveries at set prices rather than picking up inventory from the spot market, preferring quantity over quality.
The majority of coffee is moved by sea in containers, the highest quality in specialised vented containers which stop the build-up of humidity which is very harmful to the quality of the berries, and can encourage deterioration and pests. As anyone not living under a stone will know, the cost of moving containers around has increased a great deal this year as the number of slots on ships available for them has decreased. Traders worried about supply chain bottlenecks and wishing to secure and stockpile supply have been making sure their coffee moves on ships now, increasing the lack of available space and containers.
Added to this is a perfectly natural desire by farmers to hold back exports so that they can make more money as prices rise, a self-fulfilling prophesy in itself. Farmers are also failing to deliver on pre-agreed contracts, according to a recent USDA report:
“The three largest arabica producers, Brazil, Colombia, and Ethiopia, are experiencing increased rates of default, where farmers fail to deliver coffee at agreed-upon prices so they can attempt to re-sell at current higher prices.”
The weather isn’t helping either: freezing weather in Brazil in July, whilst not affecting the most recent harvest will reduce crop yield in the next Marketing Year, ensuring demand and prices for this year’s harvest remains high. La Niña is returning for a second consecutive year, bringing dry weather and further downward pressure on production volumes. Supply for the next year or two looks challenging at best, and prices are increasing as traders and importers scramble for inventory. Expect the cost of your coffee to go up, and the quality to go down.
Apart from being a classic case study in agricultural commodity economics, I think that there are parallels between the coffee market and the dry bulk freight market. We have seen a recent boom, well until the end of October, amplified by a positive feedback loop, for owners at least.
Dry bulk carriers are taken for granted at a minimal cost. The price suddenly increased, and so there was a rush to lock in future prices which reduced supply further. Those who needed to move cargo immediately paid higher prices, but the operators who had booked ships on period charters held back releasing their tonnage into the spot market preferring to use them for their own positions and contracts unless the rates offered were much better than they originally fixed at. The FFA market reacted accordingly as charterers competed with each other to lock in rates and hedge supply against what was available.
This was the story until the end of October when the market fell in the Pacific, and the paper market looked to recoup some losses. Freight rates of larger sizes fell heavily, but the physical market in the Atlantic, especially for smaller sizes, held up well driven by a lack of supply for spot tonnage and continuing demand.
The question on many lips therefore is: what now? Was this correction temporary or something more worrying. Is it time to take some profit off the table and sell some ships, or buy on the dip? Or both?
Like the coffee market there are things we can see, and some things we can’t. There are very few ships to be delivered from shipyards in the next year or two, so the supply side is constant. Demand seems to be holding up well, and if we look at today’s freight rates compared to last year’s, life is good, if you have ships that is. But the balance between a good market and a falling market is paper thin, and sentiment can tip the balance either way.
What is certain however is that the world needs dry bulk shipping as much as coffee, and despite all the ups and downs of the last few years, there doesn’t seem to be a case for a collapse in prices for either, apart from interim corrections of varying severity
So when you are next drinking your morning coffee, think about the many forces at work that lead to marginal price changes in your cappuccino, but also the huge effects they have on the farmers, traders and retailers of coffee. Then think about the minimal changes to the prices of commodities and other cargoes that dry bulk ships carry even when the freight market is booming, or falling for that matter. Like coffee, I suspect it would take a great deal more in the way of price increases before we started looking for alternatives. And also like coffee, when it comes down to it most of us can’t do without dry bulk shipping, whether we notice it or not. And that should give us a nice stimulating feeling to start our working day.