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Coffee prices are at 10-year highs, and analysts say they have further to go

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Coffee prices have reached a 10-year high, and analysts expect tightness in the market to continue all the way into 2023.

Coffee contracts for December delivery ended Monday’s trading session at $2.34 per pound. On Thursday, coffee futures on New York’s Intercontinental Exchange reached $2.46, marking the highest price since 2011, when the commodity broke above $3 per pound.

Meanwhile, the International Coffee Association’s benchmark price was $2.07 per pound on Friday, up 85% from a year earlier.

Ole Hansen, head of commodity strategy at Saxo Bank, told CNBC that over the past 12 months, “a perfect storm of events [has been] conspiring to give our beloved bean a boost.”

“The question for future price action is how much of these developments are potentially longer-lasting,” he said in a phone call. “I think we need to focus on what’s been unfolding in Brazil this year, where we’ve had a generational low in temperatures, a very quick spell of frost which hit some of the growing areas, and we’ve had a period of drought – this has left the 2022 crop in a bit of a precarious state.”

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Hansen added that these adverse weather events would affect the yield later this year, as well as in 2022 and potentially even 2023.

“We saw coffee rally to about $3 per pound back in 2011, when we had another Brazil scare,” he said. “These are really the kind of numbers that prompt the market to speculate whether we can reach those levels once again, and I think with Brazil in mind, and if the projections over the coming months continue to confirm a slowdown or reduction in output, then the risk of our brew getting more expensive is very real.”

Alongside bad weather, global supply constraints have had a substantial impact on the coffee market because producers and roasters — the companies that refine coffee into the product we drink — are often located in different countries. Market uncertainty is also stemming from exporting countries such as Ethiopia, which is on the brink of a civil war, and Vietnam, which is seeing a rise in Covid-19 cases that could hit production.

“I think on balance we have a market which is, for the first time in years, starting to show some tightness,” Hansen added.

Maximillian Copestake, executive director of European coffee sales at Marex, said that coffee was engaged in “a huge price race that is predominantly driven by freight dislocations.”

“For the last five to eight years, we’ve had supply [concentrated in] one or two big coffee-producing origins, one of them being Brazil, one of them being Vietnam,” he told CNBC via telephone.

“If you have damage in one or two of those countries, which we have had, all of a sudden the market goes crazy to try and encourage other countries to produce coffee. That is the underlying principle, and then the cherry on the top has really been the freight disruptions. So, what was already a tight balance sheet, which should have traded out in the prices rallying potentially later on in the crop, have been accentuated by these freight disruptions we’ve seen.”

Copestake noted that it takes around two years for coffee production to respond to a change in price.

“I don’t think we’re by any means out of the woods yet,” he told CNBC. “But when the price rallies, you drag every bag of coffee available in every farmer’s warehouse out to the market to commercialize, because the prices are excellent. So there is incentivization to plant more, but also to minimize stocks at origin and bring those stocks to destination. I think we’re probably in the course of doing that.”

He added that he expects prices to remain high and volatile looking ahead.

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