Coffee stocks fall despite spike in input coffee bean prices; here's why

Updated: 20 Apr 2023, 08:58 AM IST
TL;DR.

Trading Economics data show that Arabica coffee futures in the US continued to rise and reached $205 per pound, its highest level since October 12, 2022, on the assumption of fewer global coffee supplies.

Analysts claim since the start of 2023 coffee stocks have underperformed and volumes have decreased.

Despite an increase in coffee bean prices since the start of 2023, shares of coffee companies have fallen.

Over the last three months, shares of Tata Coffee Ltd, Rossell India Ltd and Tata Consumer Products Ltd has slumped from a range of 3% to 19%. However, shares of CCL Products India Ltd has gained over 7%.

Analysts claim since the start of 2023 coffee stocks have underperformed and volumes have decreased.

Why are coffee bean prices rising?

Coffee bean prices have increased due to mounting supply concerns. Trading Economics data show that Arabica coffee futures in the US continued to rise and reached $205 per pound, its highest level since October 12, 2022, on the assumption of fewer global coffee supplies.

The majority of the gains were in the last eight trading session in April where it has increased $32 per pound since March 31.

Arabica coffee futures in the last three months.

The latest data showed Inter Continental Exchange (ICE) monitored arabica coffee inventories fell to a fresh 4-month low of 708,312 bags. Dealers reported a decline in exports from important countries like Brazil and Colombia, while the demand remained steady.

Chako Thomas, Managing Director and Chief Executive Officer of Tata Coffee, in their Q4FY23 earnings conference call on Wednesday said that Arabica prices have softened due to increased availability while Robusta prices have remained firm due to reduced availability globally, especially from India.

Robusta coffee is currently trending well at around $2400 per ton, which is an 11-year high due to crop shortages. This is a significant increase from a year ago when it was in the mid to early $1900s. However, there is stress on the availability of Robusta, although large producers like Vietnam and parts of Brazil still have upcoming production.

Why are coffee stocks falling despite spike in input coffee bean prices?

In general, companies aim to pass price hikes of their products to the final consumers to safeguard their margins if input costs rise for manufacturing companies for a set period of time. While this has been the case for years for FMCG, auto, cement, and title industries, it is currently not the situation for the coffee companies. Because coffee companies think that if they rise prices, people would turn to other drinks or beverages, like tea.

For example, if the price of coffee increases by 10%, and the demand for the coffee decreases by 20%, this suggests that the demand for coffee is highly elastic.

According to Vinit Bolinjkar, Head of Research, Ventura Securities, since Robusta coffee supplies continue to remain tight, coffee prices are projected to remain elevated.

Until now due to poor global macro and unexpected inflation demand was suppressed and companies were unable to pass through the price inflation.

However with demand now looking up on the back of improved retail spending some of the previous cost inflation is expected to be passed onto consumers, enabling companies to regain pricing power and better margins.

In light of the above change in coffee dynamics we expect better performance from the coffee stocks, which erstwhile were underperformers.

Technical Views

As of April 19, Tata Coffee, CCL Products India, Tata Consumer Products ended in red, while Rossell India gained 4% on Wednesday.

According to analysts, Tata Coffee has been continuously down for the last few sessions. On April 18, early trade the stock saw strong gains backed by volumes but by the end prices gave away the gains and ended at the low point. Analysts recommend 195 - 200 as the support zone whereas 215 is resistance only beyond, which some positive momentum may trigger in the counter.

Coffee stocks in the last three months.

On Wednesday's session CCL Products India, was in consolidation phase, with volumes dried down, 540 - 580 is the range only beyond, which momentum would trigger, said an analyst.

Rossell India gained on Wednesday's trade, but the stock has been down for the last four trading sessions. Analysts said that there's no major traction seen in the stock and the volumes have dried. 230 is the immediate support whereas 270 resistance.

 

Commodity prices and stock market
First Published: 20 Apr 2023, 08:58 AM IST