Outlook for Coffee as Prices Continue to Fall

Coffee is an important beverage
consumed by billions of people every day. In the United States, Americans have
increased the consumption of coffee to the highest level in six years. This
demand has increased as more Americans continue to prefer coffee to tea and the
rise of casual dining increases. In Asia, coffee has continued to gain
popularity as the population moves to copy the Westerners. As such, American
coffee giants like Starbucks and Dunkin have continued to grow in Asia. In
fact, Starbucks opens a new store in China every 15 minutes. Today, it has more
than 3000 stores in China. This growth has attracted more competition with a
company known as Luckin Brands accelerates growth there. All this is good for
the coffee industry.

However, the farmers have
continued to see a depression in the price of coffee. The biggest producers of
the crop are in Brazil, Vietnam, Columbia, and Indonesia. Increased production
in these countries has led to lower prices. In fact, the price has been in a
bear market since 2011 when it traded at more than $3.06 per pound. Today, the
price is at a third of where it was in 2011.

In the past year, the price of
coffee that is traded in the Intercontinental Exchange (ICE) has continued to
decline to a low of $1 a pound. Part of the reason for this is that the value
of the Brazilian real has also declined against the USD as more problems in the
emerging market increase.

The challenge is that the current
situation of increasing supplies will likely not continue for a long time. As
the price of coffee increases, the return on investment by farmers reduce as
well. This is because they cannot compensate it with volumes. Since there is no
OPEC-like organization to control the production of coffee, the low prices will
likely continue to persist. However, it opens an opportunity where many farmers
will likely start moving to other profitable crops and ventures. In Kenya,
which was once a leading supplier of coffee, the then plantations have been
converted to real estate projects. Therefore, in the short term, as the supply
increases, the price could continue moving lower. In the long-term, as farmers
move to more profitable crops, the price could rise.

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