(Bloomberg) -- Coffee buyers are coming to terms with a global shortfall of arabica coffee, the high-end kind favored by cafes like Starbucks Corp., and turning to cheaper beans, driving up prices.
Robusta coffee capped the biggest monthly increase in more than seven years as demand soars amid multiple supply headwinds. Such beans are considered lower quality, and are often used in instant coffee products and blends.
Severe drought and frost slashed the production outlook for arabica beans in top supplier Brazil. Roasters in the South American nation are expected to use more of the less expensive type to meet demand and cover the shortfall.
“The fact is there's going to be a shortage, and Brazil's robusta crop will go more toward meeting domestic needs,” said Judy Ganes, the president of J. Ganes Consulting.
The November contract rose 0.4% to close at $2,026 a ton in London, the highest settlement for a most-active contract since September 2017. For the month, the price surged more than 13%, the most since early 2014. That's boosting the cost outlook for companies that use the beans, such as Nestle SA's Nescafe brands.
Robusta crops are also seeing headwinds. Vietnam, the biggest producer of the variety, has imposed Covid-related curbs that are slowing shipments. The South Americans also don't have enough shipping containers, leading to delays.
The popularity of arabica beans has soared in recent years, unlike robusta. Now, the shortage could change the dynamic. In the twelve months ending July 2021, world exports of arabica climbed 4.7% to 82.63 million bags, while robusta exports saw a decline of 3.6% over the period, according to data from the International Coffee Organization.
In other soft markets, raw sugar, arabica coffee and cotton slid in New York, all paring gains for the month amid a general commodity slump Tuesday.
“It's a risk-off day. It all boils down to Covid,” Ganes said. “It started with end-of-the-month selling” and markets are also reacting to moves by the European Union to ban American travels amid a surge in Covid infections. For arabica, there's an overreaction to ample rains expected in the first few days of September, mostly in Espirito Santo, the biggest Brazilian growing state of robustas, she added.
©2021 Bloomberg L.P.
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