Coffee: Arabica & Robusta prices, Brazil and climate change

Not all coffee is equal — and financial markets reflect this duality. 2 species dominate:

1. Arabica (Coffea arabica): 60 % of world production, superior quality, richer and more acidic taste. Grown between 800-2,000m altitude (Brazilian, Colombian, Ethiopian mountains). Sensitive to climate (frost, drought, pests). Trades on ICE Futures US (KC) in New York. - Typical 2024-2026 price: $2.50-4/pound (previously $1-2 before 2024) - Contract: 37,500 pounds (~17t) - High volatility: 30-50 %/year

2. Robusta (Coffea canephora): 40 % of production, lower quality (more bitter, more caffeine), used for instant coffees and Italian espressos. Grown on plains (Vietnam, Brazil, Indonesia). More resistant to climate and diseases. Trades on ICE Futures Europe (RC) in London. - Typical 2024-2026 price: $3,500-5,500/tonne - Contract: 10t - Arabica-Robusta spread: historically Arabica 50-100 % more expensive than Robusta. In 2024-2025, spread temporarily inverted (Robusta more expensive) due to Vietnamese drought — historic event

Top 5 world producers (2024-2025): 1. Brazil: 65-70 million bags (60kg) — #1 Arabica + #2 Robusta 2. Vietnam: 28-30Ms — #1 Robusta 3. Colombia: 12Ms — specialty Arabica 4. Indonesia: 11Ms — Arabica/Robusta mix 5. Ethiopia: 8Ms — Arabica's birthplace

Brazil alone produces ~35-40 % of world coffee. Its climate dictates prices: winter frost (June-August in Southern hemisphere) or drought can push prices +30 % in weeks.

December 2024: Arabica reaches $3.50/pound, its highest since 1977 (47 years). In 2025, it climbs to $4.30/pound at peak. Why?

Structural causes:

1. Brazilian drought 2023-2024: Brazil enduring worst drought in 60 years. Coffee regions of Minas Gerais and São Paulo (60 % of Brazilian production) receive 30 % less rain. 2024-2025 harvest expected at 67Ms (vs 75Ms initial). World stocks at 25-year low.

2. Vietnamese drought (Robusta): Mekong delta and Central Highlands (Robusta zones) suffer 2023-2024 El Niño. Vietnam production: -20 % in 2 years. Robusta goes from $2,000 to $5,500/t (×2.75) — unprecedented historic event.

3. Structural climate change: Arabica cultivable zones shrinking. Per Climate Institute, 50 % of current Arabica lands will be non-viable by 2050. Migration to higher altitudes impossible (not enough land). Colombian and Brazilian producers starting to diversify into other crops.

4. Rising world demand: Asia (China, India) discovers coffee (Starbucks +30 % stores in 5 years in China). World demand +2-3 %/year structurally, while supply stagnates or falls.

Consequences on roasters: - Nestlé (Nespresso, Nescafé): raised prices +15 % in 2024-2025 - Starbucks: margins under pressure, +5-7 % price hike - JDE Peet's (Senseo, L'OR): warning on 2025 results - Lavazza: less impact thanks to long-term contracts

2026 anticipation: if La Niña sets in (wetter weather in South America, drier in Asia), Brazil could have good 2025-2026 harvest (+10 %) bringing Arabica back to $2.50-3/pound. But Robusta would remain tense due to structural climate issues in Vietnam.

Coffee is a very volatile commodity but with understandable cycles (Brazilian weather + harvest cycle). Several vehicles:

1. ICE Arabica (KC) or Robusta (RC) Futures (advanced) - Arabica: 37,500lb ~$70K per contract, margins ~$5K - Robusta: 10t ~$50K per contract, margins ~$3K - 30-50 %/year volatility - OK liquidity on front month, low on distant expiries

2. Coffee ETFs (contango trap present too) - iPath Bloomberg Coffee Subindex Total Return (JO): ETN based on Arabica futures - WisdomTree Coffee (COFF): UCITS equivalent - Contango often present on coffee — value loss on rolls - Better short-term use (< 3 months) than buy-and-hold

3. Diversified Agriculture ETFs - Invesco DB Agriculture (DBA): coffee in basket (~10-15 %) - Diversification = lower volatility

4. Coffee company stocks (relevant buy-and-hold) - JDE Peet's (JDEP): world's #2 roaster (Senseo, L'OR, Douwe Egberts) - Nestlé (NESN): Nespresso + Nescafé, world's #1 roaster - Starbucks (SBUX): world's #1 coffee chain - Mondelez (MDLZ): Carte Noire, Jacques Vabre - Lavazza: unlisted but S.p.A. holding - Note: these stocks suffer when coffee rises (compressed margins). But benefit long-term from trading down (maintained consumption even in recession)

5. Producer company stocks (rare but existing) - Cofco International (CFCO): Chinese trader, world's #5 coffee - Olam Group (1B0): Singaporean trader - Ecom Agroindustrial (private) - More exposed to price variations but less liquid

6. CFDs at retail brokers - IG, eToro, Saxo offer Coffee Arabica CFDs - Spread ~5-10 cents (vs 0.05 cent on CME futures) - ESMA leverage ~1:10 - Good for 1-5 day swing trading

Important seasonality: - May-August: frost period in Brazil (Southern hemisphere) → prices can jump on any weather alert - September-November: Brazilian harvest → bearish pressure if normal harvest - March-April: Vietnamese harvest (Robusta) → specific Robusta impact

Strategies: - Long-term: Nestlé + JDE Peet's in standard brokerage. Benefit from trading-down and pricing power. - Climate trading: buy Arabica calls (ICE KC) in May-June before Brazilian frost season. - Pair trade: long Arabica, short Robusta when Arabica-Robusta spread abnormally low (like 2024-2025) — plays mean reversion.

My main reco: JDE Peet's is undervalued (2026 PE = 12) as victim of high coffee prices. If Arabica returns to $2.50 in 2026 (La Niña scenario), JDEP could do +30-40 %. Interesting long-term position.