World Arabica Coffee Supply Seen Likely to Stay Tight in Coming Year

Although crops from Brazil and Vietnam are likely to ease somewhat world coffee supply in the coming months, Arabica beans are seen staying on the tight side, and this will probably reduce stocks of certified beans at the ICE Futures US warehouses in the coming months and push up coffee prices, according to market participants.

The pace of decline of stocks at ICE may slow down a bit in the next three to four months, but the decline will resume soon after, commented Christian Wolthers, a market veteran with ample experience in the cash market and president and CEO of Wolthers America.

He said during a presentation at the National Coffee Association’s annual fall program on Tuesday in New York that with Brazil’s consumption expected to reach over 19.4 million bags this year and exports near 30 million bags, the country’s carryover stocks will be just 1 million bags by the end of MY 2010/11 next July.

The country started with zero carryover stocks this year and given that the country is bound to see a drop in production next year because of the biennial nature of the Arabica crop, internal demand and a strong currency will encourage producers to sell in the internal market and that’s likely to reduce exports out of the world’s largest exporter by next year.

He said that as Central America, Colombia and Brazil increase exports in the coming months, that may reduce the pace of decline of ICE stocks, but if differentials in the cash market continue at current levels, the inventories are poised to decline further next year as well.

He recalled that in 1996 as Brazil was recovering from a damaging frost, ICE stocks had fallen to 320 bags by that year (versus 1.8 million bags currently), taking world Arabica prices around $3 a pound by 1997. A similar situation could develop in the coming months, if Colombia does not see a clear recovery in production (which is doubted by trade) while Central America coffee production continues to see tough competition from other crops, clouding further the potential to refill stocks at ICE warehouses, which have fallen for 24 consecutive months.

He said that Brazil‘s area planted has continued to decline 1-2% annually for the last few year, and only improvements in productivity could push up production in that country a bit but other crops are competing as well for land and farmer resources. He noted that average productivity increased inBrazil over the few years to 18 bags per hectare from 13 bags earlier in the decade, and the country could take that to 25 bags (which is already achieved in some regions) but competition for land and resources from other crops is also tough there.

He estimates Brazil‘s crop this year at 50 million bags and next year could see a decline to 40 million bags, leaving the country with a deficit of 8 million bags for coffee by the end of MY 11/12 which could translate into lower exports out of the world’s top exporter.

Mr. Wolthers was speaking at a panel discussion over the future of the green coffee market. He was joined by John Meyer, vice-president of ADM Investor Services; Jon Stefenson, director of Marketing at Atlantic Coffee (USA) and Jonathan White, principal of White Coffee Corp. a roasting company based inLong Island, New York.

Mr. Wolthers concurred with other panelists that the coffee market this year saw the anomalous development of steady, firm demand over the summer months while ICE stocks kept falling, which led to the current market prices near 13-year highs that have spooked many in the industry.

Meantime, he said industry buyers have reduced the amount of coffee they buy beyond six months of inventories, mainly because the higher prices have reduced cash on hand and also amid uncertainty as to what’s going to happen withColombia.

Mr. Wolthers estimates world coffee output in 2010/11 at 134.7 million and consumption near 131.5 million, leaving a surplus of 2-3 million bags, which may not be enough to face the lower Brazilian output next year.

A strong Brazilian real may also discourage producers from selling above as internal prices stay strong, noted panelists.

Mr. Stefenson of Atlantic Coffee estimated the Brazilian crop at 55 million bags in 2010/11.

Mr. Stefenson defended the current certification process at ICE warehouses, which has been under fire in recent years for what participants call a “broken system” that allows re-certification of 2-3 year old coffees at ICE. He said that in some hot places likeHouston, stored coffee may lose some of its “greenish” required color, but in other places like New York and Hamburg coffee tends to stay in better shape, in part thanks to the cooler weather. He said that the ICE warehouses are the home of excess coffees, which has not been the case the last few years.

ICE Inclusion of Brazil‘s coffee still doubted

The panelists addressed the recent news that an advisory committee at ICE Futures US recommended the inclusion of Brazils washed and semi-washed Arabica coffees into the C contract.

Mr. Wolthers said that the measure faces tough opposition from ABIC, Brazil’s roaster association, whose members fear that they may have to pay more for their coffee if producers decide to take their coffee to ICE warehouses, where they would be paid higher prices. He insisted the initiative is “dead-on-arrival”, although he saw the merits of ICE hoping to stabilize the market, which has been on upward mode since early May, rattling industry users.

Two of the panelist suggested creating a new Brazil natural coffee contract, otherwise Brazil‘s lower quality coffees will over-flood the C market, depressing prices and reducing that market’s usefulness for industry to hedge costs.

Colombia Crop Still in Doubt

The panelists agreed that Colombia‘s main crop picked between Sep-Dec is still uncertain and they expressed concerns as to whether the country will be able to produce again 12-12.5 million bags of coffee as was the case few years ago. (As reported, the national Federation of Coffee Growers now estimates the 2010 output near 9.5 million bags below early estimates for 10-11 million bags and up from 7.8 million bags last year.)

Mr. White noted that given the recent prices, many of his clients have reduced their blend to replace the very expensive Colombian coffee component, and said that reduced promotion from the Colombian Federation for its 100% Colombian Coffee brand has also contributed to lower demand for Colombian coffees. But he said that could reverse if price differentials go down again to historical levels, something that could have happen next year if that country’s crop recovers significantly. He also expressed optimism that new sources of coffee will compensate somewhat falling production inColombia and some Central American countries. He mentioned China and Laos as possible sources of coffee.

Mr. Meyer of ADM Investors Services gave a wide range for Brazil‘s 2010/11 crop between 50-58 million bags but said that the real output is somewhere around 54 million bags. He said that although the market is unlikely to see a price jump to $3 a pound as was the case in 1997, if ICE certified coffee stocks continue their dramatic decline, prices will definitely climb above $2 a pound in the coming months.

ICE Dec Arabica coffee prices were recently up 4.75 cents at 190.35 cents, flirting with key resistance at 190.90 cents, which, if broken, could accelerate a move towards the 13-year high of 198.55 cents hit in August.

Reports are circulating today that Guilherme Braga, general director of Brazil’s Council of Coffee Exporters said that coffee prices could increase up to 13% up to $2.10 by April next year as Brazil harvests a smaller crop.

By Marvin G. Perez, email hidden; JavaScript is required

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