Coffee Economics 101: Brazil

Brazil is the largest producer of coffee by far. So, it should not be a surprise that Brazil drives the supply side of the supply and demand equation for coffee. Here is a snapshot of the coffee producing countries from Bloomberg Business.


Total Coffee Production, thousands of 60 kilogram bags, 2010 to 2011 season
Brazil 54,500
Vietnam 18,725
Colombia 9,500
Indonesia 9,325
India 5,100
Arabica Coffee Production, thousands of 60 kilogram bags, 2010 to 2011 season
Brazil 41,800
Colombia 9,500
Ethiopia 4,400
Honduras 4,000
Peru 4,000
Robusta Coffee Production, thousands of 60 kilogram bags, 2010 to 2011 season
Vietnam 18,150
Brazil 12,700
Indonesia 7,950
India 3,600
Cote d’Ivoire 2,100

 

As the table shows Brazil is far and away the biggest coffee producer, especially in Arabica coffee and the second largest producer of Robusta coffee. Coffee economics have to do with supply and demand and Brazil controls the major part of the supply side.

Current Coffee Prices and the Brazilian Real

The Wall Street Journal recently published comment about how a weak Brazilian currency serves to drive down the price of sugar, coffee and orange juice.

Sugar, coffee and orange-juice futures tumbled Tuesday as a weak Brazilian currency encouraged growers and exporters there to sell the commodities onto already oversupplied global markets. A weaker real encourages Brazilian producers and exporters to sell their orange juice and other products because they get more of the local currency back when they repatriate their dollar-denominated profits. Brazil is the world’s biggest producer of sugar, coffee and orange juice.

Brazil is a large and largely self-sufficient country. Thus most things that people need are available in Brazil and not imported. The cost of living does not go up or down when the local currency suffers. But coffee is priced in US dollars and when the real becomes less valuable the value of coffee in the Brazilian currency rises. Coffee economics 101 tells us that the value of the Brazilian real helps drive the supply side of the coffee equation.

A Crisis in Brazil Means a Cheaper Cup of Coffee

So, we know that a weak real leads coffee farmers to sell coffee instead of storing it for later. Where is the real going next? Forbes polled those with investment experience in Brazil and currency risk in that country.

The biggest number of respondents, 32.8%, think the real is going to R$4.  Another 14.8% said it could weaken over R$4.  A small number, 8.2%, think the real will hold firm where it is now, which is closer to R$3.30.  Given the fact that the real is already R$3.20, the market is more short the real than it is long.

The financial experts think that the real is going to get weaker versus the US dollar. If that is the case coffee farmers in Brazil will have little incentive to hold on to coffee and will probably sell more into a market that is already oversupplied. Coffee economic 101 implies that a cup of coffee will cheaper over the next year.




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