COVID-19's impact on coffee

Prices rose by 33 per cent between the end of February and end of March 2020. While this initial wave of demand was driven by at-home consumption, it was soon clear that this would not offset the demand loss from the worldwide closure of offices, restaurants and coffee shops.

Once the market began to understand this loss and learnt that harvest operations had not been significantly impacted, coffee prices collapsed by about 25 per cent in the beginning of June compared to highs at the end of March.

At the start of COVID-19, with prices set by futures and physical markets, producers in some countries benefited from devalued currencies. The Brazilian Real weakened by about nine per cent in March versus the February average, which meant the typical Brazilian producer received reasonably good prices for coffee. However, other producers, such as Honduras, Guatemala and Vietnam have kept their currencies stable throughout the pandemic, meaning that producers in those countries were considerably hurt by the weaker demand.

Coffee demand has historically been correlated to income, but with prices trading below cost of production in some markets, the downward pressure should ease. More coffee is expected to become available in major producer, Brazil, as it reaches peak harvest between June and July 2020. In fact, the Brazilian coffee producers cooperative Cooxupé reported that 12.46 per cent of the harvest was done by June 5 of this year, slightly ahead of the 11.47 per cent achieved by the same date in 2018 (the most recent comparable year). This illustrates that harvest operations have not been significantly impacted by COVID-19, despite its wider impact on Brazil.

As production remains stable, with further capacity expected, the continued closure of restaurants and coffee shops, has meant that demand for coffee has significantly decreased.

While many venues are opening up again, the need for continued social distancing and limits on capacity will likely result in lower demand in the short term. Although at-home consumption may have increased, it is unlikely to offset the loss of demand from coffee shops and restaurants. To balance this loss of revenue, producers will most likely cut production, which means it will be unlikely that coffee prices will remain below the cost of production for very long. However, with coffee being consumed at a slower rate, farmers will face difficulties until the market solves for the imbalance.