Key points:

  • The worst drought in a decade has wreaked havoc on Vietnam’s coffee plantations, with coffee production expected to fall by 10-16%.
  • Global coffee prices are already rising due to dwindling supply.
  • Uncertainty about the weather in Vietnam may cause prices to rise further.

The worst drought in Vietnam in nearly a decade has caused serious damage to coffee producers. This threatens to push up espresso prices around the world, even as some farmers have been able to maintain high yields through countermeasures.

Forecasts for next season in Vietnam, the world’s second-largest coffee producer, remain grim, weighing on the industry’s prospects.

Coffee production may fall

The deputy head of the Vietnam Commodity Exchange said the country’s coffee production could fall by 10-16% due to the extreme heat that hit the Central Highlands coffee region between March and early May.

However, renewed rainfall in recent weeks has improved the outlook somewhat, boosting confidence among farmers and officials.

However, it remains unclear whether improved weather conditions could lead to increased production and lower prices for robusta beans. Robusta is the coffee variety most often used to produce espresso and instant coffee, and Vietnam is the world’s largest producer of these drinks.

Due to the drought, farmers have been forced to use more water than usual. Fortunately, the abundant water supplies in the canals built by the local authorities allowed them to provide sufficient irrigation for their plantations. Although there are fewer coffee cherries this year than in previous years, farmers are hopeful that overall production will not be affected.

In addition, timely application of biopesticides helped them protect their crops from insects, which were present in higher than usual numbers due to extreme weather conditions.

The US Department of Agriculture (USDA) forecast matches the expectations of Vietnamese farmers: they also predict that the country’s next coffee harvest will be about the same as this season. It is worth noting that this forecast is more optimistic than domestic estimates in Vietnam.

Coffee prices will likely continue to rise

Many traders and analysts agree that wholesale coffee prices in Vietnam, as well as Robusta futures traded in London, hit record highs earlier this year.

It is worth noting that record wholesale prices haven’t yet had a significant impact on prices for consumers. According to the latest Eurostat data, coffee inflation in the 27-nation European Union rose by just 1.6% in April, and by 2.5% in Robusta-preferred Italy. Although price growth is slightly lower than a year earlier, it still exceeds the 1% recorded in March in the EU. This may indicate that coffee roasters have begun to pass on their increased costs to consumers.

In addition, concerns about the situation in Vietnam continue. Lack of rain following a drought or heavy downpours ahead of the harvest, which begins in October, could further reduce production, which in turn will lead to further increases in prices.