Coffee Brewing Slowly Despite Simmering Commodities Rally

It’s the one commodity that hasn’t exactly been steaming in this year’s rally. Prices of coffee beans are brewing even as annual revenue for roasted and instant coffee products is expected to grow a dynamic 20% this year.

There’s a reason for the disconnect. Analysts fear sales forecasts for the industry could be missed if chains like Starbucks (NASDAQ:SBUX), Coca-Cola (NYSE:KO) owned Costa Coffee, Dunkin Donuts and Panera Bread (NASDAQ:PNRA) underperform because of restrictions on dining-in by the coronavirus pandemic.

Demand At Coffee Shops 'Still Very Low'/h2

Jack Scoville, who oversees crop research for the Price Futures Group brokerage in Chicago, says there’s a definite correlation between prices for premium arabica coffee beans and sales expectations for top brand name cafes and eateries:

“The demand from coffee shops and other food service operations is still at very low levels. Reports indicate that consumers at home are consuming blends with more robusta and less arabica.”

Robusta, strong and bitter in taste, is grown exclusively in the Eastern Hemisphere, and primarily in Africa, Indonesia and Vietnam. These London-traded beans hovered at $1,323 per tonne, or 61 cents per lb, on Tuesday.

Arabica—which coffee connoisseurs say is superior with a smoother, sweeter taste—is grown dominantly in Latin American countries Brazil and Colombia, as well as in Africa and Papua New Guinea. This New York-traded variant hovered at $1.23 per lb on Tuesday, roughly double that of robusta prices.  

Weak Start For Coffee In 2021, Despite Commodities Rally/h2

But regardless of taste, superiority or price, both arabica and robusta are having a weak 2021 so far, after last year’s flat finish. 

Year-to-date, arabica is down 4% while robusta is 2% lower. Many edible commodities are having a blockbuster year so far, with sugar up 5%, corn rising 13% and lean hogs gaining as much 21%. Outside of agriculture, the rally has been even bigger in energy and metals.

In its recently released forecast for the year, business date platform Statista said it expects combined revenue for roasted and instant coffee products will be 20% higher this year at $81.2 billion.

U.K. Coffee Could Take 4 Years To Reach Pre-COVID Sales/h2

That coincided with another outlook by market researcher Allegra Group reported by Bloomberg. It said that U.K. coffee chains could take four years to return to pre-pandemic sales after last year’s loss of about 2 billion pounds ($2.8 billion) in sales.

Temporary closures and takeaway-only trading cut sales by almost 40% in 2020 for the U.K.’s branded coffee chain stores, which are dominated by companies that included Costa Coffee and Starbucks. 

The industry is expected to recover to pre-pandemic levels by 2024, although Allegra said there’s “deep uncertainty” over that outlook.

The U.K. coffee sector, which has the highest number of branded chain stores in Europe, has also faced headwinds from the economic fallout of Brexit, according to the researcher. Last year marked the first decline in sales and outlets in more than two decades.

Allegra founder and chief executive officer, Jeffrey Young said the picture that emerged from its research wasn’t too encouraging:

“The U.K. faced a perfect storm of many things that are not going right for the coffee segment and there is a lot more uncertainty in (the) U.K. than in Europe.” 

Coffee's Strong Pop Culture A Major Redemption/h2

With businesses limiting occupancy and enforcing social distancing in their premises, the usual crowded coffee shop scene of studying students, remote workers, and laughing friends has temporarily faded from view, social bloggers note.

But while coffee-house culture requires short-term adjustments, they also note that one thing hasn’t changed: people’s love for coffee. 

Thus, as creative epicenters, coffee shops are using persistence and ingenuity to survive and even thrive in the coronavirus pandemic. 

Starbucks announced in December plans for 200,000 additional stores that would put one on every important U.S. street corner. 

Farmers Unhappy With Bean Prices /h2

In the meantime, coffee growers from Brazil to Vietnam are trying to find inspiration despite weak bean prices amid the commodities boom now.

Says Scoville: 

“Vietnam has harvested its production under mostly dry conditions. Some of those crops are starting to hit the market but farmers are unhappy with the price.  Central America is also drier for harvesting but producers want higher prices.”  

Aside from a banner 2019 where it posted a whopping 27% return, and a relatively decent 8% gain in 2016, arabica has had a lousy time since 2016, with an average 0.3% compounded return. Long or short, there had been simply nothing much to make on the commodity.

'Strong Sell' Technically For Arabica; 'Strong Buy' For Robusta/h2

A technical outlook via Investing.com’s daily indicators reveals a “Strong Sell” for arabica. 

With arabica at $1.2305 per lb at the time of writing, should it trend bearish, then a three-tier Fibonacci resistance is forecast: first at $1.2067, then $1.2028 and finally $1.1990.

In the event the market turns positive, then a three-stage Fibonacci resistance is expected to form: first at $1.2163, then $1.2192 and finally at $1.2240. 

In any case, the pivot point between the two calls is $1.2115.

With robusta, Investing.com’s Daily Technical recommendation is, surprisingly,  a “Strong Buy.”

With robusta at $1,343 at the time of writing, should it signal strength, a three-tier Fibonacci resistance is then forecast, first at $1,348, then $1,354 and finally at $1,362.

In the event the upside fades and the market starts slipping, then a three-stage Fibonacci support is expected to form, first at $1,332, then $1,326 and finally at $1,318. 

In any case, the pivot point between the two is $1.2115.

As with all technical projections, we urge you to follow the calls but temper them with fundamentals—and moderation—whenever possible.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. As an analyst for Investing.com he presents divergent views and market variables.

Comments are welcome and encouraged. Inappropriate comments will be reported and removed.

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Written By: Investing.com