Brazil, the world's largest overall coffee producer, is expected to see the largest off-year crop on record in 2011, though the full effect on supply will likely not be felt until the 2012/13 harvest, said Euromonitor analyst Brian Morgan.
34-year highs
In early May 2011, Arabica coffee prices hit a 34-year high, due to several factors such as increased global demand, higher oil prices, and adverse weather patterns in various parts of the world which led to lower than average coffee yields.
Colombia, the world's larger producer of Arabica coffee, is still recovering from a 2009 crop year that saw the smallest harvest in over three decades, said Morgan.
According to the International Coffee Organization (ICO), the 2010/11 crop year began with coffee stocks at the lowest levels seen since ICO began taking records in 1965.
Total coffee prices began to fall around May and were down five per cent in June, but are still up from the same period in 2010 and are likely to remain well above US$1 per pound until depleted stocks are rebuilt, said the analyst.
Supply will lag
Morgan said investments made in crops now will typically take two to three years for the trees to mature enough to achieve a resulting increase in output. This means supply is likely to lag behind continued demand increases.
“Coffee manufacturers will need to ensure they are differentiating through product innovation and quality, loyalty programs, and efforts to enhance convenience if they hope to justify these recent added costs of purchase,” said the analyst.
Coffee price volatility
The impending coffee supply increase has led some producers such as Illycaffe to warn about cycles of over and undersupply over the longer term, adding to coffee price volatility, said Morgan.
“A similar cycle was observed in 1998, with subsequent supply flooding the market in 2001 and leading to nearly a decade of lowered prices and reduced profitability until oil prices drove major commodities higher in 2008,” he said.
Demand for at home use
But despite the soaring coffee prices, the purchase of coffee for at-home use has not seen a significant slowdown, said the analyst.
Global coffee consumption reached 134m 60 kg bags in 2010, while coffee output for 2010/11 was expected to reach only 133m bags, according to ICO figures.