Coffee has recently become one of the most common beverages in the world. This is after the Asian countries like China and India started appreciating a drink that has been a stable in the Western markets for decades. In fact, the coffee industry is seeing increased growth, with coffee shops seeing impressive growth. In China, Starbucks has opened more than 3000 stores. Luckin Brands, a new Chinese company is giving Starbucks a run for its money as it prepares for its American IPO this year.
While all this is good for the industry, coffee farmers have continued to suffer with the prices continuing to decline. The reason for this is that the market has become saturated with most of the demand coming from Brazil. The demand increase is mostly because farmers rushed to plant more coffee plants when the price started to rise. In Brazil, local prices and good weather has helped boost supply. This overproduction has led to a surplus of more than 2.3 million bags, according to the International Coffee Organization. In fact, the spread between the premium Arabica coffee and Robusta has continued to narrow to a 20-month low.
Another reason is that the Brazilian real has seen an increased depreciation as the overall economy has declined. When the local currency depreciates against the USD, it helps boost the exports because the coffee becomes more affordable.
In the short-term, there is a likelihood that the price of coffee may continue to decline. This is because coffee is different from other crops. Coffee takes many months to grow and mature compared to corn and soybeans that take a few months. Therefore, farmers are less likely to shift to other crops. Instead, they reduce their costs by using less fertilizer and by pruning trees. However, in the long-term, the farmers could cut down the trees, if the low prices persist. This has happened in countries like Kenya, where coffee farms have been replaced by real estate projects.
This year, arabica coffee has declined to the closest level since October last year. This level is not very far from its 12-year low. Robusta has posted slight gains. The price of robusta coffee is below the 14-day and 21-day EMA while the relative strength index has moved closer to the oversold level. While the CFE/USD pair could continue moving lower, traders should watch for the Brazilian real, which could provide some support.