Vietnam Drought Spurs Robusta Coffee Price Surge to $3,496/Ton

Key Takeaway

• Robusta coffee futures surged over 2% due to insufficient rainfall in Vietnam, impacting the critical fruit-forming period for plants.
• Dak Lak province, a major coffee-growing area, reported about 40% of its plants are under-watered with rainfall expected to be 50% lower than last year.
• Despite recent price drops from brief rains, persistent dry conditions in Vietnam continue to concern investors, pushing robusta prices higher.

Coffee and Cocoa Prices Surge

Robusta coffee futures have seen a notable increase for the second consecutive day, primarily due to insufficient rainfall in Vietnam, the world's top producer. The Central Highlands, including Dak Lak province—a key coffee-growing area—reported rainfall 50% lower than the previous year, with about 40% of coffee plants not receiving adequate water. This critical shortage during the fruit-forming period has raised concerns over supply, pushing robusta futures up more than 2% to $3,496 a ton in London. Similarly, arabica coffee in New York and London cocoa and white sugar prices have also experienced rises, underscoring the broader impact of weather conditions on commodity markets.

Weather Woes Impact Production

Vietnam's drought situation has significantly affected the robusta coffee supply, with the country experiencing its driest conditions in 45 years. This has led to a supply crunch, propelling prices to the highest level in decades. The recent rains, although providing some relief, have not been sufficient to alleviate the dry conditions that remain a concern for the market. Analysts from Hightower Report have highlighted these ongoing dry conditions as a critical factor for the market's direction. The situation in Vietnam is a stark reminder of how extreme weather events can drastically impact global commodity supplies, leading to increased market volatility.

Market Volatility and Supply Concerns

The volatility in the coffee and cocoa markets is not only a result of weather conditions but also due to the concentration of production in a few countries. Vietnam and Brazil account for more than half of the global coffee bean exports, while West Africa's Ghana and Ivory Coast are the largest cocoa producers. This concentration has led to significant market volatility, with cocoa prices more than doubling this year due to production shortfalls. The interplay between cocoa and coffee markets has been noted, with major traders experiencing the impact of soaring cocoa prices on their coffee trading activities. Carlos Costa from Hedgepoint Global Markets LLC mentioned that the coffee trade might have been influenced by speculative buyers drawn by cocoa's market dynamics.

Coffee's Resilience Amid Challenges

Despite the supply concerns and market volatility, the coffee market is showing signs of resilience. Coffee growers are investing in more productive plants, which supports yields and helps fend off disease. This contrasts with the cocoa market, where fixed prices in major producing countries like Ivory Coast and Ghana limit farmers' ability to benefit from market rallies. The upcoming European Union regulation aimed at preventing deforestation is expected to impact cocoa more than coffee, given the latter's global intake and the easier substitution between arabica and robusta beans.

Street Views

• Trinh Duc Minh, Buon Ma Thuot Coffee Association (Neutral on Robusta coffee futures):

  "Rains have started across the Central Highlands, but they are uneven... It’s still far away from what the plants need during this critical fruit-forming period."

• Hightower Report analysts (Neutral on Robusta coffee futures):

  "While recent rains brought prices down, dry conditions remain a concern."