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Supply shortage in world coffee market led by robusta beans

Packages Dunkin' Donuts and Folgers coffee are displayed on a shelf at a grocery store in San Rafael, California.
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Packages Dunkin' Donuts and Folgers coffee are displayed on a shelf at a grocery store in San Rafael, California.

The supply shortage in the world's coffee market is forecast to continue for a third consecutive year with the output of robusta, the lower quality bean, sliding to a level not seen since 2012.

The International Coffee Organization forecasts a supply shortage of 3.5m 60kg bags of coffee for the year beginning in October, with output at 151.6m bags and consumption at 155.1m. This is despite record production of arabica coffee, the higher quality bean, thanks to bumper crops in Brazil, Colombia and Honduras.

In comparison, prospects for robusta supplies were "less positive with lower crops expected from most major origins", the ICO said.

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Predictions of a tighter robusta market this year come as coffee manufacturers and retailers face a decline in profit margins due to the cost increases. Robusta beans are primarily turned into instant coffee or blended with arabica to add a kick to the flavour as well as lowering the overall cost.

JM Smucker, a leading U.S. coffee manufacturer, this week said it would increase packaged coffee prices sold under the Folgers, Dunkin' Donuts and Café Bustelo brand names by an average of 6 per cent. The company said the increase did not cover products on sale in Dunkin' Donuts restaurants.

Robusta production was hurt last year due to a severe drought in Brazil, and dryness in Vietnam and Indonesia on the back of the El Niño weather phenomenon. As a result, world output is expected to fall to the lowest level since 2012/13.

The lower quality beans are 43 per cent higher than at the start of 2016, trading at $2.190 a tonne. The robusta rally also supported arabica prices in the middle of 2016, although plentiful supplies later in the year triggered profit-taking.

"Prospects for a recovery in Brazil's production in 2017 are slim" for robusta, according to Carlos Mera, analyst at Rabobank.

With robusta supplies continuing to be scarce while arabica remains in abundance, analysts expect the price difference between the two beans to narrow. Referred as the "arbitrage" by analysts and traders, the price difference between the two beans has fallen about 13 per cent since the start of 2016.

If the price difference narrows further, it is likely to lead to a shift in coffee usage, with more coffee roasters and retailers reducing the amount of robusta, and increasing the share of arabica beans.

Rabobank expects "a large reduction in the share of robusta" among importers, with the robusta accounting for 35.1 per cent of the overall market in 2016/17, down from 35.6 per cent, and 34 per cent in 2017/18.