Vietnam Keeps the Pot Brewing on Global Coffee Prices
HANOI – In London, prices for Robusta coffee have surged to their highest level in five months thanks to a lack of selling from Vietnam primarily due to the Tet (Lunar New Year) holiday. Vietnamese farmers and exporters halted their selling in part because of an expectation that they would be able to take advantage of much higher prices after the end of the holiday. Growers sold only 33 percent of their beans before the start of the holiday, compared to the usual 43 percent.
Vietnam is the top producer of the Robusta variety of coffee and produces 900 million kilograms annually. Robusta is used primarily in instant coffee and specialty drinks, such as those made by Starbucks.
Coffee sales in Vietnam have been somewhat slower than normal due to exporters being reluctant to trade because they were still awaiting VAT refunds from 2013 and foreign buyers had been asking for larger discounts. However, due to events in Brazil this situation is expected to change.
Brazil is the main supplier of Arabica coffee beans and produces over 2.5 billion kilograms of coffee annually. The country is currently suffering through a drought, which has reduced the global supply of coffee and increased prices. Robusta prices were moved higher by the increase in the price of the Arabica variety of coffee.
In 2014, coffee has been the best performing commodity in the Standard & Poor’s GSCI gauge of 24 raw materials – it has shot up 24 percent. In the US ICE futures exchange on Monday, coffee prices rose 8.6 percent, reaching US$1.3595 per pound – this is the largest one day percentage gain in eight years.
In a report by the ABN Amro Clearing Bank NV it was stated that “The Tet holiday in Vietnam has probably kept much pent-up selling out of the market, but this is sure to find its way in soon.” At the beginning of this week, Robusta futures for delivery in March declined US$22 to US$1,706 on the London International Financial Futures and Options Exchange.
As Vietnam offers competitive prices in the next week, the price of Indonesian beans could also see a decline.
However, looking further out into 2014, when just looking at Robusta futures, there has been an increase of 3.4 percent for futures scheduled for May delivery. Again, this probably has more to do with the crisis situation in Brazil.
It would seem that the price of coffee has much room to continue growing as the year goes on.
As Europe’s recovery continues, the area is expected to increase the amount of coffee that it imports. This will also drive prices up. There has already been a jump of 37 percent in prices since October of last year.
Based on traders’ estimates, the current coffee crop in Vietnam is predicted to have yielded up to 29 million 60-kilogram bags; this is four million more bags than the previous growing season.
Companies such as Starbucks and Dunkin Brands Group who buy a lot of coffee will most likely see their margins shrink and the cost of their products increase resulting in a decrease in customers. As a result, share prices in these types of companies could be adversely affected in the coming months.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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