The International Coffee Organization (ICO) has released the second issue of its Coffee Break Series economic publication, titled ‘Volatile Coffee Prices: COVID-19 and Market Fundamentals’.
The COVID-19 pandemic is a dramatic public health crisis with significant impacts on economies around the world. The ICO says this issue of the Coffee Break Series focuses on supply and demand side effects on coffee price volatility.
The novel coronavirus represents an unprecedented joint supply and demand shock to the global coffee sector, constituting an enormous challenge to coffee growers, farm workers, domestic supply chains, and international trade.
The various supply and demand impacts will be felt at different points in time further contributing to global market uncertainties and the ongoing price volatility, the ICO says.
The pandemic may also have major implications for poverty and food insecurity for the world’s 25 million coffee producers, most of whom are smallholders in low- and middle-income countries that are less prepared to respond to a public health crisis of this proportion.
This publication is the first joint work with the International Food Policy Research Institute under a new collaboration that aims at leveraging ICO statistical data and in-house analytical capacity for economic research with recommendations for policy makers.
Covid-19’s impact on coffee prices
In early 2020, the report says higher and more volatile coffee prices seemed to stem from poor harvest prospects in some producing countries – like bad weather in Brazil – at a point in time when inventories were running seasonally low. COVID-19 appears to be maintaining and exacerbating these price fluctuations – especially for Arabica coffees – from both the supply and the demand side.
Since the COVID-19 outbreak was declared a global pandemic by the World Health Organization in mid-March, the virus has spread to virtually all coffee exporting and importing countries. While the pandemic is likely to affect all stages of the coffee value chain to a greater or lesser extent, the specific impacts on regional and local markets will be felt at different points in time.
The ICO says overall effects will ultimately depend on the interaction between multiple supply and demand factors, how market actors anticipate and respond to these, and the capacity of individual countries to detect and contain the virus while moving into the harvest season when labour demand peaks.
Key factors driving coffee price volatility
On the supply side, the ICO is observing impacts to varying degrees in the downstream value chain, including international shipping and local currency devaluations. Impacts in the upstream value chain will likely occur mostly when more countries enter the harvest season in the upcoming months.
In terms of demand, the coffee market saw a surge in the first weeks of the COVID-19 crisis. However, this increase was mainly driven by higher supermarket sales resulting from panic buying and stockpiling and by substituting out-of-home with at-home consumption in the face of social distancing measures. In the upcoming months, with worldwide negative growth forecasts for 2020, a looming global recession could impact overall coffee consumption. However, the ICO says demand for food items like coffee tends to be relatively inelastic, and the demand-side effects are likely to materialise with a time lag depending on the level of household savings and social safety nets.
Besides supply and demand factors, the ICO says non-fundamental factors such as speculation could also potentially aggravate coffee price volatility. Sudden movements in coffee prices during the COVID-19 pandemic may attract speculators – non-commercial traders. However, the ICO says this effect is short-term and has occurred both in periods of falling and rising prices. In the long run, market fundamentals have been shown to prevail.
Looking forward, the report suggests several potential policy responses from the government. This includes:
- Establishing emergency responses to mitigate the impact of the pandemic and support countries with lower institutional capacity.
- Facilitating recovery while fostering long-term sustainability. This includes supporting vital links along the value chain and increasing the resilience against external shocks, like the market, climate, and pandemics.
- Supporting the demand for coffee. A temporary reduction of taxes on coffee could help reduce prices to the consumer and partially off-set households’ decreased income due to the looming recession and support the at-home and out-of-home demand for coffee in key consuming countries.
The ICO: Coffee Break Series No. 2 can be viewed HERE.