Both Robusta and Arabica coffee futures posted gains on Thursday, but the different coffee varietals have seen different overall performances as of late.
Robusta futures gained 2% on Thursday to hit $1,617 per ton, and earlier in the session hit the highest price-point for a most-active contract since last November. Arabica coffee futures gained 1.5% to finish at $1.215 per lb., rebounding after hitting a two-month low on Wednesday.
The two coffee varietals have diverged due to different conditions, and crop outlooks in their major producers. Robusta’s major producer is Vietnam and in Vietnam dry conditions are expected to have hit coffee output. The opposite is true in Arabica’s top producer, Brazil. There, favorable weather conditions are expected to have boosted production. Notably, Brazil also produces Robusta coffee and the outlook for the Robusta crop is not a positive for the Arabica crop in that country. Brazil grows its Arabica and Robusta beans in different regions.
The Robusta market is getting a sentimental boost as the overall supply expectations are downgraded. Early in the year, expectations were for an essentially balanced Robusta market. Late last year, analysts were looking for a hefty surplus. The ending market balance will be highly dependent on weather conditions in Vietnam during the key months of May and June. A drought hit Vietnam early in the year and has not really mitigated. Rain levels during harvest are crucial.
At the same time, data suggests that demand for coffee remains strong. The difference between Arabica and Robusta coffee futures is quality. Arabica coffee is the premium, preferred drinking coffee whereas Robusta is used in instant coffee. The two coffee varieties can act as substitutes for each other. When Arabica becomes too expensive, some coffee drinkers will switch to Robusta. When you have the trend we see now, where Robusta prices are high while Arabica futures are lower, substitution is only likely when the global economy is strong, and this is not the case right now. Arabica is still at a premium, so for Robusta consumers to substitute Arabica, they would still be paying more money for their coffee.