(Bloomberg) -- It’s a really tough time to be a coffee producer. Prices are dismal, Brazil’s massive crops are adding to global oversupply and small-time growers in Central America are fleeing the industry. Now, the economic malaise that’s sending distress signals across financial markets is adding yet another blow to this already fragile commodity.
It can be hard to believe that the economic outlook plays a big role in coffee demand, given that caffeine addicts can usually get their fixes relatively cheaply. But while most people won’t forgo their morning jolt to start the day, it’s the extra cup or two that can feel like a luxury and end up being cut when it’s time to tighten belts.
“The demand outlook isn’t very promising,” said Hernando de la Roche, a senior vice president at INTL FCStone in Miami, who has traded coffee more than three decades. “In general, a recession would reduce demand for coffee, especially at the coffee shops. People who used to drink one or two cups in the morning at home, and then maybe one cup outside, will probably skip the last one.”
That’s bad news for a market that’s already reeling.
Prices for arabica beans, the smooth variety favored by companies like Starbucks Corp (NASDAQ:SBUX)., are down almost 10% in the past year and in May touched the lowest since 2005. Last week, the International Coffee Organization raised its surplus forecast for the global market, which also includes robusta beans. Olam International Ltd., one of the largest java traders in Asia, on Wednesday blamed lower coffee prices and sales for a drop in revenue at its confectionery and beverage unit.
The rout has hit producers hard, especially in countries with higher costs such as Honduras, El Salvador and Guatemala. Competition has gotten so fierce, and prices so low, that coffee farming has become untenable for many small growers -- leading their adult children to shun the business.
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Meanwhile in Brazil, the world’s top coffee grower and exporter, output has accelerated in recent years with highly mechanized production, and there’s no sign that trend is slowing down. The depreciation of Brazil’s real has also encouraged exports from the country. Shippers are ready to sell at an opportunity given the concerns over demand. In Colombia, the No. 2 arabica producer, the peso is also weaker against the dollar. Coffee cargoes are usually priced in the U.S. currency.
“With the volatility created by the trade war, people will become more cautious,” de la Roche said.