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market
analysis
Coffee Markets May Be Ready for New Highs
by
Maja
Wallengren
For roasters worried about supply, there is little relief in
sight. Fresh crops are going to remain in short supply for at
least another year. That means continuing high prices and the
very real likelihood of arabica futures prices climbing to all-time
historic highs, which a number of analysts believe could reach
$4 to $5 per pound. For coffee producers to maintain a minimal
margin for stable supply, futures prices need to stabilize in a
range between $3.50 and $4 per pound. This is where coffee
growers could see sufficient incentive to keep up with basic crop
husbandry. But even such a price level would not generate the
kind of massive motivation to plant new areas and increase the
acreage of the cultivated area worldwide. Many coffee areas were
abandoned for good during the crisis, and what new production
will come in from a short list of select growing countries with
the potential to expand output will be offset by the slump in
production from a long and growing list of countries. Even with
today’s (or higher) prices, this list of countries will not be able to
see their crops recover to the levels seen before the coffee crisis.
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Market Analysis: Coffee Markets May Be Ready for New Highs (continued)
Consumption in industrialized
countries has remained strong,
and emerging markets like
Russia, Eastern Europe and
China—as well as key producers
India, Indonesia and Brazil—have
seen a tremendous increase in
coffee drinking in recent years.
Coffee prices have been trading near 14-year highs for most
of the past year, and many analysts believe it’s only a matter
of time before both this threshold, as well as the 34-year
high mark, will be reached. Though there is disagreement
about where the market will go in the short term—and some
predict a market decline in the third quarter of 2011—those
in the market hoping that prices will come down in the
upcoming fall and winter season may be disappointed.
As the new 2011–12 coffee crops will start arriving from
Central America and bringing fresh supply to the market
in November and December, core fundamentals still show
the supply-demand balance at its tightest level in at least 30
years.
Even as the market can see sporadic speculation by
funds and other players pushing prices to temporary lower
levels, the kind of solid crop fundamentals that used to be
what dictated price movements in the market are making a
comeback.
“You had a market that was already over $2 [in early 2011]
and continued to go higher and in a year when you had a
record Brazil crop. That’s telling you a lot about the coffee
and quality in store, and the demand in the market,” says
Eric Nadelberg, senior vice president of investments, and
head of the institutional coffee desk at Prudential Bache
Commodities, LLC.
World coffee production reached 133.3
million 60-kilogram bags in the 2010–11
crop cycle but is predicted to fall to about
130 million bags in the 2011–12 cycle that
ends on Sept. 30, 2012, according to the
International Coffee Organization. Despite
the overall recovery in global production
in the last harvest, demand in the same
period has continued to increase at levels
well above those of production, and
the 2010–11 harvest cycle was the third
consecutive year with a deficit in the
balance.
World demand has continued to rise
at an average of 2 million bags per year
from 128 million bags in 2007 to about 134
million bags in 2010, with the 2011 figure
expected to reach at least 136 million bags.
Consumption in industrialized
countries has remained strong, and
emerging markets like Russia, Eastern
Europe and China—as well as key
producers India, Indonesia and Brazil—
have seen a tremendous increase in coffee
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Market Analysis (continued)
drinking in recent years. Brazil is closing in on the United States as the world’s largest
consumer in overall volumes, with local industry officials estimating that local demand
today is near 20 million bags. The consumption in Brazil has increased between 500,000
bags and 1 million bags during the last decade, as compared to a local consumption of
about 14 million bags in 2001 and 2002.
At the end of the day, prices can only be kept artificially at lower levels for so long
before the coffee has to be physically delivered. When that moment arrives for those who
are short, it will be expensive because the coffee needed to deliver the volumes required
to maintain basic price and supply stability is not there. And there is no realistic
possibility to see any surplus in the market materializing until the end of 2012 when the
then 2012–2013 crop cycle starts.
“The coffee isn’t there, and the market is facing structural deficits that, because of
the nature of the coffee trees itself, means the supply can’t respond as aggressively as the
market is requiring. Going forward in the next three years, I don’t see any replenishing
of the supply,” Nadelberg says.
“Basically it’s spot market players that keep the market buoyant, and I don’t think
the market will have a problem to move significantly above three dollars in terms of the
way the fundamentals look,” he adds.
Monthly demand by importing countries and roasters is today at between 7.5 million
and 8 million bags. Even in the best of cases—with a bumper crop from Brazil and decent
crops from Mexico, Colombia, Central America and Peru—the monthly export volumes
from these key Latin American
arabica producers will in the
new 2011–12 cycle barely be able
to surpass 5 million bags, and
that is when the crops are at
their peaks. Add the relatively
small arabica volumes from East
Africa and India in addition to
robusta beans from Vietnam,
Indonesia and Africa, and the
basic minimum world import
demand will, in the most
optimistic of forecasts, more or
less break even.
This, however, does not
include the supply needed to
fulfill the fast-growing demand
in producing countries, which
takes the total monthly world
demand to between 11 million
and 11.5 million bags. Or even
fewer, if any surplus coffee is
used to rebuild depleted world
stocks. The precarious balance
will leave no room for crop
failures, and reports of even
the slightest damage or harvest
complication will serve as a
trigger that has the potential to
send the market into a panic.
“Anything is possible
here,” says Marco Ruttimann,
a partner in the Miamibased
brokerage Coffee-Link
International. “The imbalance
U.S. coffee retailers
and roasters are
already under pressure
from a 50-percent
hike in prices for green
beans in the last four
months, as consumer
prices in the same
period have been
raised only about
20 percent.
in the supply-demand picture is so precarious that anything that might go wrong at this
stage in producing countries, especially in Colombia and Brazil, could send this market
flying to levels never dreamed before.”
Jack Scoville, vice president of the Chicago-based Price Futures Group, is one of
many who believes it’s not a question of if but when the market will next rally. And
many of those driving the market are simply not aware of how tight supply is, which
could add to the alarm.
“Fundamentals suggest high prices for another year or so,” Scoville says. “When the
blessed rally might happen is hard to say, but I think sooner rather than later. A disaster
or some kind could push prices up to the $3.65–$3.70 area.”
“We will look for better crops in Central America, but probably not get them,”
Scoville adds. “The amount of investment by farmers there has been a disappointment,
and the big guys have been buying. But the speculators might not realize just how tight
things will stay after September until we get closer to the date. Once people realize the
coffee is already gone, then we can see the last run.”
U.S. coffee retailers and roasters are already under pressure from a 50-percent
hike in prices for green beans in the last year, as consumer prices in the same period
have been raised only about 20 percent, says veteran Brazilian coffee trader Christian
Wolthers of Florida-based arabica importer Wolthers America Inc.
“The situation is chaotic, and I can’t see any relief in the next many months because
all the coffee is in the hands of the producers,” Wolthers says. “I am telling my clients
that every time the market dips, it’s a buying opportunity and they should buy as much
coffee as they can, because next time the market dips, it will be from a higher level.”
When the market approached the new Brazil crop in May this year, prices reached
a then-high of $3.09. Analysts agree that once prices top the 14-year highs of May 1997,
when the New York coffee market hit $3.18 per pound, it will be a short distance to top
the 34-year highs of $3.37 per pound reached in April 1977 and then move on to new
historic highs.
To make matters worse for U.S. roasters, which in most cases sit on a maximum
of four to eight weeks of supply, producers are in no hurry to sell the little fresh
supply coming out. This will put further pressure on arabica futures, according to the
independent Colombian coffee analyst Pedro Echavarria.
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Market Analysis: Coffee Markets May Be Ready for New Highs (continued)
“The Central American producers
feel they got burned when they sold their
[2010–11] crop early at between $2.30 and
$2.40, which was seen as a great selling
opportunity at the time. But when the
new harvest started, the market opened
at a range between $2.40 and $2.60, and
producers now understand that the market
is in a serious deficit situation,” says
Echavarria.
He said that with the smaller crop in
Brazil as well as in key producers like Peru,
India and Indonesia, and continuing crop
failure for the third consecutive year in
Colombia, analysts like him are wondering
where any fresh supply will come from once
the current Brazil crop is sold.
What’s more, producing countries in
both Central America and East Africa also
continue to struggle to recover even basic
output levels, and the regional-based
crop average from both arabica areas is
still significantly under volume (by 20 to
30 percent) of that seen in the late 1990s.
This is an important detail because there
are no other countries or regions in the
world with the potential to provide any
significant backup supply of arabica.
Arabica provides for 65 to 70 percent of
total global demand for coffee, with the
balance largely made up by robusta.
The International Coffee Organization
estimates that stocks in importing
countries prior to the start of the current
Brazil harvest now under way were at
historic lows of about 13 million bags.
This is the equivalent of just over one
month’s world demand of about 11.2
million bags and represents the lowest in
history based on known statistics.
When the market hit $3.18 per pound
in 1997, importing countries had about
20 million bags of stock to draw on from
producing countries. But at the moment,
there are no inventories left in the hands
of growers and what little new crops are
being produced are practically sold and
shipped before they are even picked.
“The arabica coffee market
continues to be a ticking time bomb
with a short fuse that any unexpected
supply disruption could set off,” says
commodities analyst Judith Ganes-Chase,
of J. Ganes Consulting. “In 1997, producers
had plenty of coffee to ship into the rally
to cool it immediately, and now they
don’t. Roasters’ ability to shift to cheaper
robusta is also hindered because they’ve
done this already.”
Echavarria agrees and adds that
with the continuing crop problems in
Colombia, there is no easy fix to the
current situation.
Contrary to public reports from
Colombian coffee officials—and the U.S.
Department of Agriculture, which is
forecasting a 10-percent rise in production
for 2011–2012—the coffee harvest of
the world’s largest producer of topquality
arabica beans has not made any
significant level of recovery.
Analysts and industry officials in
both Colombia and elsewhere point out
that even if the overall crop volume from
Colombia may rise between 5 percent and
10 percent, this will take the total harvest
to about 9 or 9.5 million bags. And that
can hardly be described as a recovery for a
country that used to produce between 11.5
and 13.5 million bags just a few years ago.
Furthermore, even if this modest increase
materializes, it won’t allow for stocks to
refill.
Despite an improvement in
production and export figures in
Colombia’s main crop that ended in
January this year, this was offset with
what producers and traders alike agree is
one of the worst “mitaca” mid-crops in
the country’s history.
“Colombia didn’t have a mitaca this
year; in the best case, it will be as good
as 2008, which was the worst in history,”
says Echavarria.
Increasing production is not an
option to ease the current supply squeeze,
because even if heavy investments into
new plantings and renovation of farms
are made, these efforts won’t result in
more coffee until three or four years from
now.
The countries with both the land
and labor available to enable any
significant expansion of production
include Tanzania, Vietnam, Honduras,
Peru and Brazil. And while only Brazil
can count on the investment needed to
undertake any serious expansion, most
industry observers in Brazil doubt that
will happen.
“It will take three to four years for
Brazil to increase production if prices stay
high, which I believe they will for quite
a long time,” says Luiz Hafers, a veteran
analyst in Brazil and currently the
director of the Brazilian Rural Society’s
coffee department. He adds that given
the current supply-demand balance, and
no realistic possibility for any significant
recovery in world production for several
years, prices could even rise to $4 or $5 per
pound.
Hafers points out that the last time
Brazilian coffee producers embarked on
a serious expansion effort, both the price
and production incentive was boosted
by the fact that there were few other
alternatives. “But this is not the case
today,” he adds. “Sugar cane, grains and
forestry all compete for investment, and,
last but not least, labor for coffee is and
will be very difficult.”
So what will it take to get producers
sufficiently interested in increasing
production to meet the continually
growing consumption levels?
Echavarria says prices need to be
adjusted to 30 years of inflation, which
have yet to catch up with the current
prices. Coffee prices were initially fixed
at a minimum $1.20 per pound during
the Cold War-era pact on quotas and
prices between importing and exporting
countries.
If prices during the International Coffee
Agreement from 1962 to 1989 were trading at a
fixed minimum of $1.20 per pound, analysts
say, then a modest 3-percent annual inflation
rate today puts coffee prices at between $3.50
and $4 per pound. And that is a conservative
calculation, as that price range does not
incorporate the much sharper inflationary
increase in petroleum prices, which make
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Market Analysis: Coffee Markets May Be Ready for New Highs (continued)
up a major component of coffee production for inputs such
as fertilizer, the operation of machinery and mills, and the
transportation of workers.
“If we look at the coffee prices nowadays and compare
them with prices 10, 20 years ago, it’s easy to conclude that $3
is nothing special at the end of the day,” says Joaquim Libanio
Leite, export director for the Cooxupe cooperative in Minas
Gerais state, the world’s largest coffee cooperative in charge of
about 15 percent of Brazil’s output.
Both Hafers and Echavarria also agree that the devaluation
of local currencies in the face of a weak dollar presents yet
another challenge for those who want to argue the possibility
of a lasting correction to the current market.
“We need to look at the dollar because devaluation is a fact,”
said Hafers, while Echavarria adds: “All the major producing
countries, like Brazil and Colombia, have strongly devalued
currencies. So what is $3.70 in an inflation-adjusted price needs to
be $4.50 in Colombia to reflect this.”
In July 2011, Colombia’s peso traded at 1,760 to the U.S. dollar,
a significant appreciation from February 2009, when the peso was
trading at 2,600 per dollar. Brazil’s real, similarly, went from 2.45
to the dollar in December 2008 to 1.55 per dollar in July 2011.
Once the new 2011–2012 East African and Latin American
Coffee consumers will still need
their daily cup of coffee, and
there is no magical solution as to
where the beans will come from.
arabica crops start to reach the market in the coming months,
roasters, importers and brokers will all need to position themselves
for the fall season. During the last quarter of the year, from October
to December, 45 percent of the year’s roasting is done. And analysts
expect it will be a buying frenzy when everyone tries to secure their
supply of crops in a market that won’t produce enough to satisfy
all.
For major roasters such as Starbucks, Kraft Foods and Folgers
Coffee, as well as the small and medium-sized companies, the
pipeline of fresh supply could dry up before any new big crop
will provide the market with relief.
“Fundamentally speaking, we have in the past 50 years not
seen this level of such major shortage in terms of the structural
producing capacity currently available in the world, and prices
are headed toward $4 per pound,” says Echavarria.
Some analysts and parts of the trade believe that if
flowering is favorable for the 2012–13 crop in Brazil, which next
year will embark on an up-cycle with a big harvest, then this
could see the market revert to a more bearish trend.
“It’s difficult to say how high is high, but easier to pinpoint
a potential turning point and an end to this multi-year bull
market. A frost-free winter in Brazil and successful flowering of
the 2012–13 crop could do the trick,” said Ganes-Chase.
A big Brazil crop is expected to start reaching the market
by June 2012. But that is still far off—and it will be little
consolation for roasters and importers that a big Brazil crop will
arrive by June if by March or April there is no fresh supply left to
buy in the market. Coffee consumers will still need their daily
cup of coffee, and there is no magical solution as to where the
beans will come from.
Maja Wallengren started writing about coffee 17 years ago and
has, during years of coffee travels, covered a variety of coffee issues firsthand
from more than 40 producing countries in Southeast Asia, East and West
Africa, and Latin America. She is based in Mexico City and can be reached at
mwallengren@hotmail.com.
Editor’s Note: The opinions expressed in this article do not
necessarily represent the views of Roast magazine.
32 roast September | October 2011 33