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Coffee Capped on Low Roaster Inventory as Brazil Delivery Starts

Coffee prices are set to stay low as roasters are buying less than usual, rules allowing Brazilian coffee to be delivered in New York come into force and a record global crop compensates for leaf rust losses in Central America.

While countries in Central America and Mexico may lose 4 million to 5 million bags to leaf rust next season, coffee will trade between $1.40 a pound and $1.60 a pound for the next 12 months, said Ricardo Villanueva, president of the private sector committee at the International Coffee Organization. He correctly forecast in September that futures would drop to $1.40 a pound by February and March this year. Arabica for May delivery was little changed at $1.43 a pound in New York.

Coffee roasters hold stockpiles to meet their needs for two to three months, said Keith Flury, an analyst at Rabobank International in London. Their holdings are usually higher than that in years when trees in leading grower Brazil enter the lower-yielding half of its cycle, he said. Global coffee output will climb to a record 144.4 million bags in the season started Oct. 1 in most countries, the London-based ICO estimates. ICE Futures U.S. started accepting Brazilian beans this month.

“It’s a buying strategy. People are buying less to keep prices low. They are buying to roast in a month,” Villanueva said in an interview at the ICO’s offices in London on March 5. “As Brazil will start to deliver to the exchange in March 2013, this could keep prices at a low level.”

Arabica coffee futures have dropped 0.6 percent this year after falling 37 percent in 2012, the most in more than a decade. The beans favoured by Starbucks Corp. (SBUX) were the worst performer in the Standard & Poor’s GSCI gauge of 24 commodities last year as stockpiles climbed to the highest since 2010.

ICE Delivery

At the moment, it’s not advantageous for producers in Brazil to deliver to ICE as they are getting better prices in the physical market, said Flavio Ribeiro, a broker at Flavour Coffee in Rio de Janeiro. There have been no Brazilian beans sent for grading yet, Claire Miller, a London-based spokeswoman for the exchange, said by phone from London yesterday. That may change when beans from this year’s crop start entering the market, Ribeiro said. Brazil’s arabica harvest starts in June.

Growers in Brazil will reap 47 million to 50.2 million bags of coffee this year, a record for a year in which trees enter the lower yielding half of the two-year cycle, the government’s crop forecasting agency Conab estimates. That follows a record 50.8 million bags during the on-year half of the cycle in 2012. Stockpiles in Latin America’s biggest economy were 28.4 million bags as of Jan. 1, 20 percent higher than a year earlier, according to exporter Terra Forte Exportacao e Importacao de Cafe Ltda.

Colombia Crop

Bigger crops in Brazil and Colombia, the second-biggest arabica producer, will help compensate for losses in Central America and Mexico for now, Mauricio Galindo, head of operations at the ICO said in an interview at the organization’s offices on March 5. Colombian coffee production will gain 30 percent to 10 million bags this year, Luis Genaro Munoz, the head of the National Federation of Coffee Growers, said last month.

“The supply and demand is in balance,” Rodolfo Trampe, executive coordinator of Mexico’s coffee association, Amecafe, said in an interview in London yesterday. “You have probably 48 million to 50 million bags in Brazil, you have good output in Vietnam, Colombia is slowly recovering.”

Countries in Central America and Mexico may need 10 years to recover from leaf rust, ICO’s Galindo said. The fungus, which attacks foliage, is damaging crops that are at higher-than- normal altitudes and is more resistant than in previous cases, Villanueva said.

Coffee Substitution

Losses in Central America and Mexico will probably not cause arabica coffee futures in New York to rally as roasters replace these beans with supplies from Brazil, Colombia and some African nations, Amecafe’s Trampe said. Roasters are adapting to the new supply and demand environment, he said.

“This phenomenon of leaf rust is generating producers’ expectations of a significant reaction in prices,” Trampe said. “I’m not in favor of saying that all production will be lost and that prices will be $3.00 a pound. It’s not going to happen.”

Futures may start rising in a year as supplies from Brazil will not be enough to make up for leaf rust losses, according to Villanueva. Prices will rise to an average $1.70 a pound by the third quarter, Rabobank International estimated yesterday.

“By December or January the availability of Central American coffee will start to drop sharply,” Villanueva said. “There will be 5 million bags less in a year and it’s not possible that there won’t be a reaction.”

A bag of coffee weighs 60 kilograms (132 pounds).

To contact the reporter on this story: Isis Almeida in London at Ialmeida3@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at Ccarpenter2@bloomberg.net.

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