Oversupply of Brazilian Coffee Drives Down Global Prices as Farmers Struggle

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Coffee farmers in areas such as Latin and South America have been struggling as prices for their crops continue to plummet. Brazil announced a record level of arabica coffee production, 62 million 60-kg bags of the commodity in 2018 according to the government’s food supply agency Conab.

Analysts have already been expecting that Brazil will produce another massive crop of the widely consumed bean, despite the relative “off” year for arabica trees. Reuters last month reported that many groups were expecting production to dip in the years to come, expecting 2019’s harvest at 55 million bags. This is due to the historic trend of Brazil’s coffee production following a cycle of with one “on” year of major production followed by a lower output “off” year to let the trees recover.



However, even with a lower 2019 production, the estimated 55 million bags produced would set it above every year for the past decade. Brazil is often called the “Saudi Arabia” of coffee, producing a third of the world’s output and retaining one-quarter of the worlds international export market. As such, coffee farmers will find little respite in the coming future.

New York coffee prices, the benchmark for bean traders, are currently sitting at around $1.10 per pound. This is well below the $1.20 to $1.50 levels need for many Latin American farmers to make a profit. According to the Financial Times, many growers in Colombia have switched to producing coca, a plant which is processed into cocaine, while Guatemalan farms have been abandoning farms at a record rate.

Coffee futures are forecast to average $1.24 per pound this year, predicting an upturn for farmers. At the same time, the weakening Colombian peso and Brazilian real against the US dollar might have played a part in pushing farmers to sell more of their crops – which are priced in US dollars usually. Should the dollar weaken, that would create the opposite effect, slowing down exports from Brazil as domestic coffee becomes more expensive to ship and make coffee prices rise. However, the real remains around 45 percent below its 20-year moving average against the dollar, so the possibility of a weakening dollar seems unlikely at this point.

“You can’t have everybody in the chain winning at the same time,” said Lucio Dias, commercial director at Cooxupe, the world’s largest coffee-growers cooperative. “Now, it’s been the time of the industry.”

Unlike other commodity producers such as oil, natural gas, and precious minerals, coffee farmers are usually on the wrong end of the value chain, receiving only a tiny fraction of the retail price of their crops. This stands in contrast to the cultural popularity of coffee in the west, as many major companies such as Coca-Cola, Nestle, and JAB Holdings spending billions in acquisitions in the agricultural coffee space.




Starbucks, for example, invested $20 million in helping small farmers subsidize their operations until coffee prices rise to cover the cost of production. “For us that is an initial step, acknowledging we need to do something helpful in the near term in the countries that need it most,” said Michelle Burns, Starbuck’s head of coffee.

Time will tell how coffee producers will fair, but most traders and speculators alike anticipate a price rise in coffee during 2019, but not by much as trends continue to point to ever increasing production.



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