Coffee May Rally 10% as Rain, Fungus Cap Supply, Kanematsu Says

Coffee may extend a rally to $2.15 a pound by the end of this month as supply from Colombia, the second-largest producer of arabica beans, may be smaller than forecast, said Japanese trading company Kanematsu Corp. (8020)

“We had expected Colombian production to recover to 10.5 million bags next year. But output may be less than 10 million,” said Daisuke Kobayashi, trader at the beverage ingredients section of Tokyo-based Kanematsu, Japan’s largest importer of specialty coffee. Colombian growers cut this year’s crop forecast by 5 percent to 9.5 million bags on Oct. 14.

Coffee has rallied 44 percent this year as above-average rainfall hampered a recovery from Colombia’s smallest harvest in 33 years last year, while drought in Brazil, the world’s biggest producer, may reduce its output to a four-year low next year. Global demand will continue to grow, led by emerging markets such as Brazil and Russia, Kobayashi said.

“Coffee consumption in Brazil, which expanded by 6 to 7 percent annually, may surpass the U.S. to become the world’s largest as early as 2012,” he said in an interview in Tokyo.

Arabica coffee for December delivery lost 1.6 percent to $1.9615 a pound on ICE Futures U.S. in New York Nov. 3. The price reached $2.046 on Oct. 26, the highest level since August 1997. Coffee shipments from producers will decline in 2010 from last year’s estimated 95.5 million bags and 2008’s 97.7 million, according to the International Coffee Organization. Each bag weighs 60 kilograms, or 132 pounds.

Easing Expectations

To be sure, coffee could drop as much as 16 percent in coming weeks after an “exaggerated” rally this year, Christian Praun, a trader at Terra Futuros, Brazil’s fourth-biggest coffee brokerage, said Oct. 27.

“Coffee may not have much room to advance as its rally was driven by not only fundamental factors but credit-easing expectations,” said Masayo Kondo, the president of Commodity Intelligence Ltd., a Tokyo-based research company.

The Federal Reserve announced yesterday it will buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation.

Still, Colombian coffee output slumped 32 percent to 7.8 million bags last year, the smallest volume since 1976. A damaging fungus and above-average rainfall that affects plants’ ability to flower may hamper next year’s crop, Agriculture Minister Juan Restrepo said on Oct. 15.

Reduced supply from Colombia spurred roasters in Japan, the world’s third-largest importer, to seek alternatives from countries including China and Laos, Kobayashi said.

Colombia was the second-largest coffee supplier to Japan last year, shipping 76,911 metric tons of green beans, data from the Ministry of Finance show. Japan’s purchases from China and Laos were 6,336 tons and 1,260 tons respectively.

Robusta Shift

A surge in arabica coffee prices also prompted some roasters to shift to robusta beans to curb an increase in the raw-material costs, which may help narrow a price gap between the two products, Kobayasi said. Arabica coffee is grown mainly in Latin America and brewed by specialty companies including Starbucks Corp. (SBUX) Robusta coffee, used in espresso and instant drinks, is harvested mostly in Asia and parts of Africa.

Robusta coffee futures lost 0.4 percent to $1,932 a ton in London on NYSE Liffe on Nov. 3. The price reached $2,010 on Nov. 1, the highest level since October 2008.

A rally in coffee boosted costs for processors including Key Coffee Inc, the largest Japanese roaster after UCC Holdings.

“If the market climbs further, we may have to consider raising product prices,” UCC said in a statement on Nov. 2.

Yuji Niikawa, senior managing director at Key Coffee, told reporters on Oct. 25 the company may decide whether to raise prices after watching the market’s movement “for a while.”

Imports May Drop

Higher prices may lead to a drop in Japan’s coffee imports next year as many of Japanese roasters have difficulty in passing increased raw-material costs onto customers amid deflation, Kobayashi said.

Japan’s deflation deepened in September as core consumer prices declined 1.1 percent on year after a 1 percent drop in August. If roasters raise product prices, consumers may reduce purchases as coffee is not a necessity, Kobayashi said.

To cope with higher raw-material costs, companies such as canned coffee makers may cut the volume of beans in each product rather than raising their prices, he said.

Japan imported 390,938 tons of green coffee beans last year, rising from 387,538 tons in 2008, according to the Ministry of Finance. The country also imported 6,020 tons of roasted coffee beans last year, down from 6,652 tons in 2008.

Japanese imports, including soluble and liquid coffee, peaked at 458,507 tons in 2006 and then retreated to 425,778 tons in 2007 because of rising international prices, according to All Japan Coffee Association, a roasters’ organization.

Of the total imports, about 30 percent is used for production of canned coffee and the similar volume is used to produce instant coffee, according to the group.

To contact the reporters for this story: Aya Takada in Tokyo at atakada2@bloomberg.net; Ichiro Suzuki in Tokyo at isuzuki@bloomberg.net.

To contact the editor responsible for this story: James Poole at jpoole4@Bloomberg.net

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