Coffee beans, the "core asset" during the epidemic

If an investor had held the Intercontinental Exchange (ICE) Arabica coffee bean futures contract expiring in March since January last year, the yield would be 80% (without taking into account the leverage effect of margin) – well above gold, known as a "safe-haven asset" (-3% over the same period), and the NASDAQ index, which has fluctuated with the Fed's monetary policy (6% over the same period).

The rise in the price of coffee beans is the result of short supply, which is clear from inventory. According to data released monday by ICE, the level of coffee bean stocks at the contract port warehouses it tracks has fallen to its lowest point since February 2000. In fact, ICE inventories have been falling continuously since September last year, during which every link in the coffee bean industry chain has gone wrong from production to circulation.

The shock first occurred on farms in South America. Brazil is the world's largest coffee producer, with annual exports accounting for more than 30 percent of total coffee trade, but it experienced its worst drought in nearly a century since last May, and the July cold wave pushed the lowest temperatures in its largest coffee-producing continent to its lowest since 1944. Two rounds of extreme weather coincided with the Brazilian coffee bean harvest season, resulting in a nearly 20% year-on-year decline in the production of arabica and Robusta coffee beans combined.

Global maritime congestion also makes it difficult to circulate coffee beans. Coffee bean traders usually use container ships to send sack-packed coffee beans from production areas to the rest of the world, but as the shortage of container shipping capacity increases, traders have to choose dry bulk carriers to transport green beans, despite the slow transportation of dry bulk carriers and difficult loading and unloading.

In addition to the shortage of capacity, high freight rates have also distorted the direction of the green bean trade, last year reflecting the world's major shipping container freight rates FBX index rose 2.7 times, according to analysts at the financial institution StoneX, the current Brazilian coffee bean producers will be originally supplied to the international market of green beans sold to domestic buyers is more cost-effective.

The result of the obstruction from production to circulation is a drop in inventories and an increase in prices, which is transmitted directly to downstream retailers. Last June, food company Kraft raised the price of its coffee products by nearly 10 percent in the same week as J.M. Smucker. Starbucks and Nestlé, which are dominated by two major markets for stores and bulk coffee, said they offset some of their costs through futures hedging, but both said they may adjust the price of coffee products within this year.

At present, it is still very difficult to determine when the supply of coffee beans will return to normal. This year is theoretically a "big year" in the two-year production cycle of Brazilian coffee beans – the "big year", but the long-term epidemic and recent floods have made it difficult for analysts to determine whether the expected bumper harvest will come through field research, and the future climate is still uncertain.

Nine institutions surveyed by Bloomberg forecast the median brazilian coffee bean production this year at 3.68 million tons, up 16% from last year, but still 6% less than the previous "big year" in 2020. ICE's Arabica coffee bean futures, which expire in December, are only 0.7% lower than those due in March, indicating that the market does not expect the shortage of coffee beans to ease in the near term. (Intern Sun Haining)