According to the top manufacturer of the U.S. packaged coffee brand Folgers, its revenues and profits for the three months to October had been hit hard as consumers stopped their purchases after the company raised its prices earlier this year.
Folgers’ revenues and profits for the three months to October had been badly hit as consumers halted their purchases following the company’s increase in price. The U.S. group increased prices to consumer by an average of 9 % in response to higher prices for arabica beans because of the bad weather plaguing Brazil.
Coffee sales volume in the quarter fell nearly 20 % divided market bulls and bears regarding the effect of higher prices on demand in the world’s largest coffee consumer.
The news further added to the general complaisant sentiment. Arabica prices have climbed nearly 70 % since the beginning of the year but are down more than 15 % from October high of $2.29 a pound.
The news did however contribute towards reasons to be more conscious for the short to medium-term market prospects.
Rainfall in Brazil, the largest coffee producer, brought much relief to coffee farmers there and the absence of physical buying in leading European countries such as Germany resulted apprehension among market players.
Financial players, specifically the hedge funds that were lagging behind the buying over the past several months have successfully pared back their bullish positions.
Continuing concerns regarding the production in Brazil have provided support, but the prospect of the lower consumption which would lessen the pressure on prices even Brazilian supply despite still being frail, has led to profit taking.
Coffee bulls are making the best effort in trying to take comfort in the view that demand is generally inelastic or relatively not responsive to higher prices. This resulted in some coffee drinkers to shift to cheaper brands if prices rise too high at the top end but overall demand will still remain relatively unfazed.
The undisputed fact still remains that the vital drink for morning goers will not abruptly change anytime soon. Some analysts have attributed the decline by discounting rival roasters looking to take a piece in the market share.
The recent absence of an upward momentum in the coffee market can partly be explained by high inventory levels in the supply chain. The global end of the season coffee stocks at the end of August are predicted to be the highest in more than a decade due to the past bumper crops. With that, many coffee companies and roasters have brought forward supplies and are well covered according to experts.
Coffee trees in Brazil are presently blossoming and it is not clear what will the consequences on next year’s crop of residual damage from the drought at the beginning of this year.
The price of Coffee
The bulls are likely seeking support in data such as the ratio between demand and inventory. Not long ago, the demand for coffee both in the emerging and developed markets has increased so fast that arabica coffee stock/demand ratios are at the lowest since the 2010-2011 crop year when coffee prices hit a 34-year high of more than $3 pound.
The apprehension for ordinary coffee drinkers is that the buffer presently provided by cheaper competition, the inexpensive bean normally used in instant coffee may not be as highly demandable this time around.
With the sharp jump in arabica prices two years ago led to ‘switching’ of beans with cheaper brands creating more cost effective blends by increasing the amount of cheaper beans used in the mixed.
In 2010-2011, Indonesia and Vietnam, the leading producers of robusta, had bumper crops with both countries expecting smaller harvest in the coming season. There could be an additional volatility in coffee prices in the coming months.