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Bad Java: Poor Coffee Crop Adds to Indonesia's Woes

Harvested coffee berries drying at a plantation in Tanggamus, Indonesia

Photograph by Dimas Ardian/Bloomberg

Harvested coffee berries drying at a plantation in Tanggamus, Indonesia

(Corrects the sixth paragraph to say that Brazil is the world's largest producer of coffee.)

For coffee traders, there might be reason to worry about Java—the place, not the brew. Indonesia, home to Java and thousands of other islands, is the world’s No. 3 producer of Robusta coffee, one of the two major types consumed worldwide and the variety used in most instant coffees. Since April, the country’s coffee-growing regions have gotten as much as twice the 30-year average rainfall.

That’s causing major problems for Indonesia’s coffee harvest. Deliveries are down about 16 percent, Dutch trader Nedcoffee tells Bloomberg News. Shipments of robusta beans from Indonesia in the five months ending August 2 were down 16 percent, and traders estimate robusta inventories by yearend will fall 34 percent, to 52,000 metric tons. The U.S. Department of Agriculture expects (PDF) Indonesian coffee production to fall 12 percent this year, due largely to weather extremes: drought during the flowering period, heavy rains during the harvest.

The bad weather afflicting the country’s coffee farmers is just one of many plagues dragging down Indonesia’s economy. Emerging markets worldwide are hurting as investors prepare for tapering by the Federal Reserve, and Indonesia is one of the countries hurting the most. The Indonesian currency is at its weakest level in four years and the stock market is sliding: The benchmark Jakarta Composite fell more than 3 percent on Tuesday, adding to a dismal August in which Indonesian stocks tumbled by 13 percent. The country’s foreign exchange reserves fell 5.5 percent in July, the worst performer in Asia. Following declines in May and June, the shrinking forex reserves “will likely raise concerns with ratings agencies,” Bloomberg Industries analyst Jonathan Tyce wrote in a report published on Monday.

The latest to scale back expectations about Indonesia’s economy is UBS economist Edward Teather, who on Tuesday published a note cutting the bank’s forecast for Indonesian growth to 5.6 percent this year, from an earlier forecast of 6 percent. Next year, UBS sees growth falling to just 5. 2 percent, down from its earlier forecast of 5.9 percent.

The poor Indonesian harvest is going to create headaches for coffee traders, but American consumers probably have little reason to worry about the rains translating into higher prices for their coffee soon. There’s already a glut of beans on the market, with the U.S. Dept. of Agriculture predicting supply will exceed demand for the fourth year in a row. That’s one reason retail prices this year have been falling for Folgers Ground (SJM) (down 6.8 percent, according to Bloomberg Industries) and Maxwell House Ground (KRFT) (down 10 percent).

Thanks to economic woes in the world’s largest producer of coffee, Brazil, supplies will be plentiful. With the national currency, the real, having dropped 19 percent since the end of April, Brazilian farmers selling beans at dollar-based prices are eager to take advantage of the sudden windfall. “Everybody thinks that the Brazilians are going to sell as much as they can to take advantage of the weak real,” Chicago-based Price Futures Group vice president Jack Scoville told Bloomberg last week.

Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.

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