Robusta is beating arabica for the first time in four years as roasters use more of the cheaper grade and farmers reap fewer beans in Vietnam, the top grower.
While robusta, used in espresso and instant coffee, typically costs less than the arabica used to make specialty drinks by retailers including Starbucks Corp. (SBUX), its discount has narrowed to 73 cents a pound, from 145 cents at the end of 2011. The spread will contract to 55 cents by the end of the year, the lowest since July 2009, as demand increases to a record, the average of 10 trader estimates compiled by Bloomberg shows.
Roasters used more robusta in their blends to control prices as arabica surged to a 14-year high in May 2011 after the smallest Colombian crop since 1976 and reduced output from top supplier Brazil. Even after falling 26 percent this year, arabica is still more expensive than robusta and is the worst- performing commodity of 24 raw materials. Retailers are reluctant to change the taste of products again so soon in the $75.5 billion global market as consumers choose cheaper options.
“We have additional demand the market has to cater for and roasters are unlikely to shift back to arabica,” said Kona Haque, an analyst at Macquarie Group Ltd. in London who has followed agricultural markets for 14 years. “A smaller crop in Vietnam is very bullish for robusta prices.”
Robusta rose 14 percent to $2,067 a metric ton (94 cents a pound) this year on NYSE Liffe in London as arabica declined to $1.672 a pound on ICE Futures U.S. in New York after Brazil forecast a record crop for this year. The Standard & Poor’s GSCI gauge of 24 commodities added 3.6 percent and the MSCI All- Country World Index (MXWD) of equities gained 8.2 percent. Treasuries returned 2.1 percent, a Bank of America Corp. index shows.
The slump in arabica is already spurring some companies to cut retail costs. JMSmucker Co., which owns the Folgers brand, lowered retail prices in May by about 6 percent. Futures have declined another 6.3 percent since then. Smucker anticipates lower coffee costs for the remainder of the year, President and Chief Operating Officer Vincent C. Byrd said on a conference call with analysts Aug. 17.
As much as 2 million bags, each weighing 60 kilograms (132 pounds), of the 5.5 million bags of additional robusta demand this year came from roasters switching varieties, according to Holland Capital LLP, a London-based agricultural investment company founded in 2011. Robusta will account for 46 percent of all coffee consumption in 2012-13, up from 44 percent this season and 40 percent in 2010-11, Volcafe Ltd. estimates.
“Blend recipes were changed, and consumers were also shifting to the cheaper option in the supermarket,” Volcafe, the coffee unit of commodities trader ED&F Man Holdings Ltd., said in a quarterly report e-mailed yesterday.
Vietnamese production may drop 10 percent to about 21.7 million bags in the 12 months starting Oct. 1, from a record 24.2 million, according to the median in a survey of as many as 10 traders, growers and shippers this month.
The weight of last year’s crop on trees weakened older branches, obliging farmers to prune them. That means production will decline this year, said Le Tien Hung, the Dak Lak-based deputy general director of Sept. 2nd Import-Export Co., the country’s fourth-biggest exporter.
Additional robusta demand also came from arabica-producing nations, which imported cheaper beans for consumers and exported more of the costlier variety, according to Euan Mann, a partner at Holland Capital. Shipments from Vietnam to Mexico, the third- biggest source of arabica in stockpiles monitored by ICE Futures U.S., more than doubled from October through June, data from the General Statistics Office in Hanoi compiled by Bloomberg show.
The glut of arabica may diminish because the next harvest in Brazil will be the smaller one of the two-year growth cycle. Coffee production in Brazil dropped to 43.5 million bags in 2011-12 from 48.1 million bags in 2010-11, according to Conab, the Brazilian agriculture ministry’s crop forecasting agency.
While robusta is taking a larger share of the increase in demand for coffee, overall consumption growth is slowing. It expanded 0.5 percent last year, below the past decade’s average of 2.5 percent, according to the London-based International Coffee Organization, which has 43 member countries.
Sales in Spain fell 2.6 percent in 2011 and in Italy retreated 1.6 percent, ICO data show. Retail prices rose 16 percent in both countries, according to the ICO. Consumers in countries including Portugal, Greece, Belgium and Spain are drinking more at home, said Michael Schaefer, the head of consumer foodservice at Euromonitor International Ltd., a London-based researcher. A grande latte at Starbucks in London costs 2.50 pounds ($3.95), about the same price as a 200-gram (0.44-pound) jar of own-brand instant coffee at Tesco Plc, the world’s third-largest retailer.
Emerging markets are compensating for the decline, with Brazilian demand rising every year since at least 2005-06, Macquarie data show. Brazil consumed 19.6 million bags of coffee in 2011 and the U.S. 22 million bags, according to the ICO. Brazil may become the biggest consumer in two to three years, according to Marcos Pinta Gama, the country’s permanent representative to international organizations in London.
Worldwide sales will reach $75.5 billion this year, from $70.8 billion in 2011, according to Euromonitor.
“In lean economic times, consumers make trade-offs with their household budgets and that often includes moving toward lower-priced coffee options,” said Brian Kubicki, the vice president of marketing at Massimo Zanetti Beverage USA Inc., based in Portsmouth, Virginia. Massimo Zanetti Beverage is using more robusta because consumers want cheaper coffee and the company, whose brands include Segafredo Zanetti, isn’t planning to alter its blends, he said.
Roasters are seeking to secure Vietnamese supply from the next harvest earlier than normal this year because the old crop was “wolfed down” at such speed, Volcafe said in a July 27 report. Robusta demand will reach 59 million bags in 2012-13, from 57 million, matching supply, estimates CoffeeNetwork. The Miami-based unit of broker INTL FCStone Inc. is also predicting a 7.6 million-bag surplus in arabica.
Speculators turned bullish on robusta in February and are holding close to their biggest bet on rising prices since the Liffe exchange started publishing the data in October. Hedge funds are their most bearish on arabica since about the start of 2009, U.S. Commodity Futures Trading Commission data show. Their net-short position of 14,783 futures and options now compares with a net-long 36,754 contracts when arabica reached $3.089 in May last year, the highest since 1997.
Robusta stockpiles monitored by Liffe have fallen 66 percent from a record 417,420 tons (about 7 million bags) in July 2011. Arabica inventories tracked by ICE Futures U.S. stood at 1.89 million bags by Aug. 23, the most since October 2010.
Robusta exports from Brazil, the second-biggest grower after Vietnam, fell 62 percent in the first seven months of the year, according to Cecafe, the country’s coffee exporters’ council. Drier weather in India, the fourth-largest producer, may curb output by 15 percent, said Ramesh Rajah, president of the Coffee Exporters Association of India. Monsoon rainfall was 14 percent below the 50-year average as of Aug. 22, according to the India Meteorological Department.
“People are buying lower quality and cheaper coffees, which usually have a higher content of robusta beans,” said Michela Stama, the director of the coffee buying department at Luigi Lavazza SpA in Turin, Italy, which operates in more than 90 countries. “People have less money available for foodstuffs and coffee is one of the items being impacted.”
To contact the editor responsible for this story: Claudia Carpenter at Ccarpenter2@bloomberg.net.