How the coronavirus has helped push down the wholesale price of coffee 30% in a month

The coronavirus has killed hundreds of people, pushed the airline industry into chaos and thrown a wrench into the plans of businesses around the world. And even one of the world's most popular drinks isn't immune to the virus's impact.

Even one of the most popular drinks in the world isn't immune to the virus's impact

A man wears a surgical mask while inside a Starbucks location in Hong Kong last month. Coffee shops have been hit hard by coronavirus fears as people stay home. (Paul Yeung/Bloomberg)

The coronavirus has had a contagion effect on many aspects of the world's economy, touching a variety of markets including the tourism industrymovie theatres and even Canadian mortgage rates.

And it seems like one of the world's most popular beverages also isn't immune to the virus's impact, as the price of coffee has plunged this month — while fears of a pandemic have gone in the opposite direction

The wholesale price of arabica coffee beans has dropped below $1 US a pound on the New York ICE exchange this week, a more than 30 per cent tumble from where it was at the end of December.

China is a small player in the global coffee industry, but it's a fast-growing market, says Carlos Mera, a commodities analyst with Rabobank. Starbucks and Chinese rival Luckin each have more than 4,000 locations in China, which is why when the two chains shuttered many of their Chinese stores last month it was bad news for coffee farmers a world away.

"If people are worried about the virus," Mera said, "they will not hang out in coffee shops," so it makes perfect sense why that sudden lack of demand helped send prices lower.

Long way down

That's not to suggest China is the only factor at play.

Part of coffee's problem is that it spent the latter part of 2019 on a tear, rising to its highest price in more than two years, at just shy of $1.40 US a pound in December. Since then, the price of many assets, including oil, stocks and the Canadian dollar, have plunged as investors pour money into safe havens like gold, bonds and the U.S. dollar.

Coffee prices have been swept up in that broader flight to safety.

Luckin Coffee has closed most of its stores in and around Wuhan, China, since the outbreak began. (Jason Lee/Reuters)

The threat of potential pandemics like coronavirus (2019-nCOV) making their way around the world tend to hit agricultural commodities like coffee hard, said Aakash Doshi, the head of commodities research at Citibank in New York. He said even staple crops like wheat and soybeans took a hit during the SARS outbreak in 2003.

"From a macro perspective, this has really impacted agriculture commodities overall," he said.

Coffee has been hit along with numerous other non-essential commodities, he said, not because it is especially dependent on the Chinese market but rather because investors are afraid the world economy is going to slow down. 

Coffee prices can often be volatile in uncertain economic times, and the past few months in the global economy have been anything but certain. 

Starbucks has shuttered about half of its Chinese stores since the outbreak began, including this one in Shanghai's subway system. (Qilai Shen/Bloomberg)

"The start of 2020 has been pretty busy with geopolitcal tensions between the U.S and Iran and now the coronavirus," said Geordie Wilkes, head of research at London-based Sucden Financial. "There's a lot of risk-off sentiment in those two stories alone that's not going to help commodity prices."

Wilkes said in the current crop year, he's forecasting an oversupply of about five million bags worth of arabica beans. With prices where they are now, coffee is selling below the cost of production for some producers. It's a situation that is unlikely to last, he said, but worries about the coronavirus and the status of next year's crop are definitely "a dark cloud hanging over the market."

And that cloud is just one of many in the perfect storm that hit the global coffee market in early 2020, Doshi said.

"It looks like the coronavirus was the straw that broke coffee's back," he said, "but some of the signs of weakness were already emanating."