Soaring coffee prices will squeeze Asia’s café culture

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First chocolate, now coffee — the supply of modern life’s necessities is being squeezed by a changing climate. Extreme temperatures and droughts in south-east Asia, home to the world’s second- and third-largest producers of coffee beans, have led to lower harvests. Falling bean supply has implications not just for our daily lives but also for company earnings.

A heatwave in Vietnam, the world’s second-largest bean producer, could reduce output by as much as a fifth in the year to September compared with a forecast from the US Department of Agriculture. Exports from Indonesia, the third-largest producer, are also expected to drop for similar reasons, which would mark a second consecutive year of decline.

As a results, global coffee bean futures are near record highs. Prices of London robusta coffee futures, the global benchmark, are up by more than 50 per cent in the past year to about $3,500 a tonne.

Do not expect a quick return to normal. Following last year’s record low harvest in Asia, some farmers have switched from coffee to crops such as rubber, which are easier to produce in warmer, humid weather.

Line chart of Share prices rebased in $ terms showing Pricey beans too much for Asian coffee chains

The timing is especially bad for coffee-related businesses. Consumption in south-east Asian countries has been soaring, with demand in Indonesia alone doubling over the past decade.

In China consumption is up more than 130 per cent, as revealed by the exponential growth of coffee chains there. The country now leads the world with the most coffee chain stores, ahead of the US. Luckin Coffee, China’s answer to Starbucks, has more than 16,000 stores earning sales of $3.5bn last year.

Output from Brazil, the largest arabica bean producer, is in high demand, with exports to China up 160 per cent in the first two months of this year. Exports to Japan have also nearly doubled. A tight market and few alternatives mean a shortage from south-east Asian producers will quickly squeeze the margins of beverage and coffee-related businesses.

This retail sector has already been an underperformer in Asia. In Japan, for example, shares of food group Ajinomoto, parent of Ajinomoto AGF, which makes instant coffee products, and Ito En, the Japanese drinks company that operates speciality coffee shops in Japan, have significantly lagged the broader benchmark Nikkei 225 over the past year.

This is bad news for coffee fans across the region. These companies have little choice but to pass costs on to consumers.

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