Coffee prices rose at the beginning of the year.

Coffee prices across the markets have risen sharply. A capital adjustment by investment funds is occurring on futures exchanges. Coffee prices, which were suppressed in 2013, are now being rapidly compensated. On the other hand, there are rumors that the next harvest will not be as large as many people thought.

However, this unfortunate situation only lasted for a day. The Liffe NYSE robusta futures price gradually recovered strongly.

In the domestic market in the Central Highlands provinces, on the opening day, the price was only 33,000 VND/kg, a decrease of 500 VND/kg compared to the last day of the previous year. However, by Saturday morning, January 11th, many places were offering quite actively around 35,000 VND/kg, an increase of 2,000 VND/kg. “Unlike the difficult months at the end of the previous year with the VAT refund scheme and the ‘check before refund’ system that discouraged businesses from trading, now buying and selling is ‘reopening up’,” a representative of a foreign-invested company in Lam Dong happily reported.

Meanwhile, many farmers have also started selling their coffee, although the sales volume is not as massive as many people expected. “I have plenty of stock now; whenever I need money, I sell a little at various prices, 33,000 VND, 34,500 VND, and it’s all done…”, said Thanh, a farmer with a plantation in Dinh Trang Hoa, Di Linh, Lam Dong.

With only about three weeks left until Lunar New Year, "the gradual increase in prices is actually a welcome relief, as it allows me to buy more incense and flowers for the holidays...", Mr. Thanh said happily upon seeing the price rise again.

Indeed, after a sudden drop of $69/tonne on January 2nd, London robusta futures prices gradually edged up. By the end of the week on Friday, January 10th, London robusta futures closed at $1,739/tonne, an increase of $125 compared to the "unlucky" opening day of the year.

Structurally, robusta prices are inverted because the March 2014 price is $30/ton higher than the May price. This indicates that the market needs immediate delivery and is willing to pay a higher price. If selling for distant delivery, the shipper must accept a $30/ton discount. This is a stringent condition because the cost of distant delivery is usually higher than for nearby delivery.

Arabica coffee futures prices have also risen sharply in recent days. At the close of trading on the weekend, the New York exchange reached 122.90 cents/lb, up 9.2 cents from January 2nd, equivalent to $203/ton.

Why are prices rising?

The sharp and unexpected price increase in the past few days can be explained by the fact that, after each quarter and year, investment funds often rebalance their capital and portfolios, adjusting them by shifting funds to new positions where prices had been suppressed previously. This adjustment process usually lasts for several consecutive days.

On the Liffe NYSE futures exchange, certified robusta coffee inventories continued to decline, according to the bi-weekly report. As of January 6th, the amount of Liffe NYSE-certified robusta coffee had decreased by a further 1,820 tonnes compared to the previous report, falling to just 28,200 tonnes, a 73.11% drop from 52 weeks ago when it stood at 104,860 tonnes.

Meanwhile, ICE New York certified arabica stocks as of January 10th stood at 161,560 tons, 5.7 times higher than robusta stocks. An estimated 105,000 tons of certified arabica are currently in warehouses across Europe, ready to replace robusta in this large consumer market.

Public opinion on output is shifting.

In just the first few days of 2014, market sentiment regarding global coffee supply and demand has shifted, and as a result, coffee prices on both futures exchanges are benefiting.

Conab, the agency responsible for assessing crop yields under the Brazilian Ministry of Agriculture, believes that due to the recent drop in arabica prices to their lowest level in six years, Brazilian farmers have lost confidence in the profitability of coffee cultivation and are rapidly switching to other crops. Therefore, according to Conab, the next crop year, which should have been a "good year" in the cycle, is now a "bad year," with estimated Brazilian coffee production reaching only 46.53 to 50.15 million bags (60 kg per bag). This figure is not significantly higher than 2013, also a "bad year" in the cycle, when the agency estimated around 49.15 million bags, while other estimates put the figure at 57-60 million bags.

According to the biological cycle of the Arabica coffee plant in this country, if it fails this year, it will be the next year's turn to succeed.

Also on this occasion, Volcafe, a Swiss-based coffee trading company, estimated Brazil's next crop yield at only 51 million bags due to "low flowering and fruit setting... as the coffee plants had already yielded two consecutive bumper crops." However, Volcafe's estimate for Brazil's production in the recently harvested crop was 57.2 million bags, 8 million bags higher than Conab's estimate.

For a long time, when commodity markets were merely bait for hedge funds, announcements about production were often considered "rumors": when someone wanted prices to rise, they would say production would decrease; conversely, when demand and prices fell, they would often say there was a good harvest.

To avoid losses caused by rumors, consuming countries and large businesses around the world usually have their own production research departments, maintain rigorous statistics, and act based on the figures obtained by their respective units.

That is indeed a valuable lesson for the country's coffee industry.

According to Saigon Economic Times