Due to the recent occurrence of extreme weather, the production of many agricultural products has been hit, leading to a series of increases in futures prices. This wave of pressure is also expected to be transmitted to the consumer end.
U.S. coffee futures for September delivery on the Ice Exchange climbed more than 7% Monday to more than $2 a pound. Coffee futures have surged more than 21 percent in the past three trading sessions to hit a 6-1/2-year high and are up more than 60 percent this year.
Market participants said the double whammy of a South American winter frost, which has already affected Brazil's coffee crop this year, could cut production and prompt funds and investors to buy long coffee futures.
Most of the world's coffee is produced in Brazil, Colombia and Vietnam, with Brazil being the largest producer.
Coffee prices have been climbing steadily on concerns that a lack of rain in Brazil will affect production. No precipitation has been reported in Brazil's largest arabica coffee producing region for two weeks. The soil moisture is reported to be well below 60 percent of what coffee crops need to grow. Market participants also said the frost damage to coffee plants could be "very significant". There is more concern that frosts could destroy leaves and branches, affecting Brazil's 2022 crop prospects.
Brazil's harvest has been disappointing, with arabica coffee production falling by about 35% between 2021 and 2022, while logistics disruptions have reduced coffee exports in Colombia and Vietnam, said Ubs fx and commodities strategist David Jordon. In addition, continuing dry conditions are having an impact on plant health and concerns are growing about the harvest potential in 2022 to 2023.
However, the surge in coffee futures prices may have little impact on consumer coffee. 'The cost of the beans as a percentage of the consumption end of drinking coffee is very low,' Mr. Jordan said. It has been calculated that about 4% of the price of a cup of coffee is the cost of the beans.
In addition to coffee, corn and soyabean prices are at multi-decade highs as weather conditions affect the Midwestern us harvest.
Yang Yan, analyst at DailyFX, said: "Since the outbreak, commodity prices have entered a great bull cycle, with insufficient supply and recovery in demand leading to reduced inventories and higher prices. Monetary and fiscal stimulus and wage increases have also played an important role in the rapid rise in inflation."
Any weather-related headwinds could push prices of commodities such as coffee higher, says Mr. Jordan, who is bullish on grains, live cattle and soft commodities, which include coffee, cocoa, sugar, corn and wheat.
The WMO's recently released "Extreme Summers: Floods, Heat and Fires" report noted that parts of Western Europe, where soil water content is already close to saturation, received two months 'worth of rainfall in just two days on July 14-15. Climate change was the underlying cause of the heavy rains and floods that swept Western Europe this summer, and extreme weather events and natural disasters will increase until mitigation is achieved, said World Meteorological Organization Secretary-General Petre Taras.
While European wheat production is expected to increase this year, some of the harvest may eventually be converted from grinding bread products to feeding farm livestock. That would threaten food exports to North Africa, which is heavily dependent on food imports.