Arabica Coffee: Weather, Earthquake and Politics Behind a Volatile Rally

Of these factors, weather has been an important factor influencing coffee prices this year. More broadly, Natural disasters and extreme weather are affecting commodities worldwide. The Financial Times reports that El-Niño related weather conditions have been widely cited as a key contributor to recent movements in arabica coffee futures. The impact is not limited to coffee. According to the European Central Bank, strong El Niño events typically raise global food commodity prices by around 9%. Economists at Jefferies have warned that the impact could be larger this time, given several ongoing conflicts around the world (Financial Times).

For coffee in particular, the concern may extend beyond a single season. El Niño is described as the biggest threat to overall coffee supply (Financial Times). As extreme weather becomes more intense and destructive, it may affect both arabica and robusta futures more than in the past (Financial Times). This is relevant because the two varieties can, to some extent, serve as partial substitutes in certain applications, disruptions affecting both markets simultaneously could reduce available alternatives for buyers and contribute to broader price volatility.

While El Niño shaped the broader trend, the earthquake in Colombia caused a sudden disruption. In August, a magnitude 7.4 earthquake damaged the road connecting Colombia’s coffee-producing regions to the Pacific port of Buenaventura (Financial Times). For a crop that relies on transportation from farm to port, such disruption can have a significant impact on the amount of coffee that reaches the market, even if the coffee beans themselves are not lost.

The timing exacerbated the situation, as the shock hit a market with little capacity to absorb it. Colombia provides about a fifth of US coffee imports, and arabica stocks held in international exchange warehouses were described as low (Financial Times). With limited stored supply to draw on, interruptions to fresh supply can feed through to futures prices more quickly. On top of this, Colombia was already anticipating a smaller harvest this year, with a forecast decline of about 13% (Financial Times). Together, a smaller expected crop, disrupted transport links and low warehouse stocks together provide a possible explanation for why prices reached their highs in the weeks following the earthquake.

The price of arabica can also be put into perspective by comparing it with robusta. According to Bloomberg, arabica is generally associated with a milder and more aromatic flavor profile, while robusta typically characterised by higher caffeine content. The difference between the two prices, known as the arabica–robusta spread, reflects the premium of arabica over robusta. It also indicates how much arabica goes into coffee blends: the higher the premium, the more valuable arabica is at that moment (Bloomberg). A wide spread can therefore point to strong relative demand for arabica, whereas a narrowing spread suggests that this premium is declining.

At present, the spread stands at around 145 cents, having declined by around 9% during this week (Bloomberg). Arabica still carries a substantial premium, but the recent decline suggests that part of its relative value has eased. High price levels and a narrowing premium can, therefore, occur at the same time, and the headline price alone does not show how arabica is valued relative to robusta.

Beyond weather and supply considerations, politics has added another layer of uncertainty. As the largest producer of coffee, Brazil is particularly relevant for prices, and its recent election has created considerable uncertainty and turbulence in equity markets (Financial Times). President Luiz won re-election, and the result caused significant reactions in financial markets (Financial Times). The Brazilian real fell 8%, while the Bovespa equity index fell almost 14%, as reported by the Financial Times. Currency developments, together with changes in supply, may lead to further price changes in the coming months (Bloomberg). The market environment therefore combines weather, supply and political factors, which can make price developments harder to assess.

The harvest season is beginning in Colombia and other coffee-producing regions in Latin America, which may bring more product onto the market (Bloomberg). Together with currency movements, these supply developments could lead to further price changes. Whether additional supply will affect the price trend, however, remains uncertain. On the one hand, new harvest volumes could ease the tight supply situation. At the same time, weather conditions remain an area of focus. According to the Financial Times, El Niño continues to be viewed as a significant factor for coffee production. The Financial Times also reports that Colombia was already expecting a lower harvest this year, while transportation infrastructure has been affected by the recent earthquake.

Overall, the increase in arabica prices since June illustrates the sensitivity of coffee markets to developments relating to weather, supply conditions and broader economic factors. At the same time, the recent narrowing of the arabica-robusta spread may indicate changes in relative pricing dynamics between the two coffee varieties (Bloomberg). Taken together, these developments highlight the range of factors that market participants continue to monitor in the global coffee market.