Coffee and Sugar – Complementary in Life, Correlated on the Market

on Oct 4, 2012
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According to the Financial Times, agricultural commodities analysts and traders have noticed that the prices of sugar and coffee have been moving in a very similar fashion over the past few months. Michael McDougall, commodities broker in New York, theorised that the close and almost “symbiotic relationship” could perhaps be linked to the climate in Brazil.

The correlation between the two commodities became most visible at the end of May when heavy rains in Brazil negatively affected the sugar cane crushing and the coffee crop. Between early June and 20 July, sugar soared by 24 percent, while the higher quality Arabica coffee beans rallied by 22 percent.
Brazil is responsible for more than 25 percent of the world’s sugar production and almost half of the exports, which explains why sugar traders always keep a close watch on the Latin American country. Bloomberg reported that sugar output in Brazil’s Centre South rose by 14 percent to 3.14 million metric tons in the first half of September. The favourable dry weather in the last month contributed to a stronger harvest following the rainy months of May and June. Raw sugar futures in the international market increased by 1.7 percent last week boosted by speculation that rain would once again disrupt the harvesting process.

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!m[](/uploads/story/523/thumbs/pic1_inline.png)“A potential shortfall in the Brazilian crop owing to weather and a downside to Thai production, combined with recently reduced estimates for Indian production and higher Indian consumption should keep prices supported,” Deutsche Bank AG said in a quarterly report quoted by Bloomberg.
Brazil has held the place of the world’s largest coffee producer for a long time but its production has mainly been concentrated on lower-quality arabica coffee and the bitter robusta beans. This trend is starting to shift as the country is now producing more and more of the higher-quality arabica and slowly catches up with the leading supplier of high-quality beans – Columbia. Soft commodities analyst at Radobank Keith Flurry believes Brazil now has real influence on the New York arabica market and that “the market has shifted from its sole focus on Colombia.”

Meanwhile, according to research in The Grocer magazine, the price of a kilo of coffee in the UK’s supermarkets has risen from an average of £19 in 2010 to over £23 today. The Office of National Statistic released inflation figures showing that the price of coffee sold in shops rose by around 14 percent this year compared to 2011. Howard Shultz, president of the worldwide Starbucks chain, blamed market speculators for the increase in the costs of coffee and complained that “every coffee company has to pay extraordinarily high prices for coffee… not based on supply and demand”.

Spikes in prices on the agricultural commodity markets affect shop prices with an approximate 12-months delay according to Matthew Ferguson, expert at market analysis at BrandView.co.uk. UK caffeine-lovers should not be surprised if next summer retailers once again charge higher prices for the black vitamin as a result of this year’s ongoing gains for both coffee and sugar.

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Coffee Deutsche Bank AG Agriculture Agriculture stocks Commodity Stock Market