Arabica’s Allure Returning for Roasters After Rout: Commodities

Coffee roasters are poised to add more arabica beans to their blends at the expense of robusta as the two varieties’ relative cost narrows to a four-year low.

The gap between futures declined to 35.4 cents yesterday from $1.89 in May 2011. The switch takes several months and probably will start if the spread stays at 35 cents, said Rodrigo Costa, director of trading at Caturra Coffee Corp. in Elmsford, New York. Arabica will average $1.57 in the fourth quarter, 18 percent more than now, as robusta drops 3.6 percent to $2,075 a metric ton (94 cents a pound), the medians of as many as six analyst estimates compiled by Bloomberg show.

Robusta’s market share advanced to 46 percent last season, the most since at least 2006-2007, Macquarie Group Ltd. estimates. Shrinking economies drove demand for cheaper blends and arabica rose to the costliest in 14 years in 2011 after Colombia, the second-biggest arabica grower, reaped its smallest harvest in more than three decades. Robusta gained 12 percent this year as drought threatens the next crop in Vietnam, the largest robusta shipper, as arabica dropped 7.1 percent on prospects for rebounding supply.

“What happened to coffee blends in the past two years, with more robusta usage, was a direct result of high arabica prices and lower consumer spending,” said Costa. “It’s much simpler to switch to arabica than to robusta because it’s a higher-quality product.”

Agriculture Index

Arabica fell to $1.336 a pound this year on ICE Futures U.S. in New York, after plunging 37 percent in 2012. Robusta advanced to $2,152 on NYSE Liffe in London, after adding 6.3 percent last year. The Standard & Poor’s GSCI Agriculture Index (MXWD) of eight commodities was up 0.3 percent this year, and the MSCI All-Country World Index of equities advanced 5.8 percent. Treasuries lost 0.4 percent, a Bank of America Corp. index shows.

A 35-cent spread in futures would imply price parity in some physical markets, according to Costa. Some lower-grade arabica is cheaper than locally-produced robusta in Brazil, according to Winterthur, Switzerland-based Volcafe.

Consumption of arabica will climb 3 percent in 2013-14, after being stable this season and sliding 5 percent a year earlier, according to Volcafe, a unit of ED&F Man Holdings Ltd. Robusta demand will gain 3 percent, from 6 percent this season and 15 percent a year earlier.

Arabica is grown mostly in Latin America and favored for specialty drinks, while robusta comes mainly from Asia and parts of Africa and is used in instant coffee and espresso. Roasters use both beans in some blends.

Maxwell House

The slump in arabica is helping consumers, with J.M. Smucker Co. and Kraft Foods Inc. (KRFT) cutting U.S. prices by 6 percent last month on their Folgers and Maxwell House brands. Global retail coffee sales will be a record $79.6 billion in 2013, from $75.8 billion last year, according to Euromonitor International, a consumer research company in London.

Production of all varieties of coffee will rise 6.4 percent to a record 144.6 million bags in the season that started Oct. 1, according to the International Coffee Organization in London. Arabica will account for 88.8 million bags, or 61 percent of the total, the ICO estimates. A bag of coffee weighs 132 pounds.

Just as the switch to a higher ratio of robusta in blends took two years to develop, so the reverse is likely to take more than one season. The premium, which closed today at 36 cents, will need to stay at 35 cents to 40 cents for one or two quarters before roasters make significant changes to blends, said Costa of Caturra Coffee.

Fungal Disease

Demand for robusta will be partly sustained by preferences in emerging markets including Brazil and Russia, where buyers tend to favor instant coffee or cheaper blends that contain more robusta, according to Mauricio Galindo, the head of operations at the ICO, which has about 70 member nations. Consumption in emerging markets grew an average of 3.9 percent a year in the past decade, compared with 1.1 percent in developed nations, ICO data show.

The anticipated rebound in arabica supply is threatened by the spread of leaf rust in Central America and Mexico. The fungal disease is present on about 70 percent of farms in Guatemala and the nation needs $100 million to fight it, according to Ricardo Villanueva, president of the ICO’s private sector committee. Slumping prices curbed growers’ funds to limit the impact of the outbreak, ICO Executive Director Roberio Silva told reporters in London on March 8.

Robusta output is also threatened and greater-than-expected damage from drought may curb the retreat in prices anticipated in the Bloomberg survey. The harvest in Vietnam may plunge as much as 30 percent to an eight-year low in 2013-14 because of a lack of rain in the main growing regions, according to the median of eight trader and shipper estimates compiled by Bloomberg.

Buying Decisions

Faster global growth should boost demand for arabica, said Andrea Illy, chief executive officer of Illycaffe SpA, which sells coffee in 140 countries. The International Monetary Fund expects the world economy to expand 3.5 percent this year, from 3.2 percent in 2012. The U.S., the biggest coffee consumer, will accelerate from the third quarter and in each of the following three quarters, according to estimates from as many as 84 economists compiled by Bloomberg.

“When you have economic crisis, all the roasters tend to trade down the bulk of their production,” Illy said an interview in London. “When you have better economic conditions and better prices of coffee, roasters tend to go back and increase the arabica percentage in their blends.”

Brazil Harvest

Brazil will harvest 47 million to 48 million bags in 2013, a record for a year in which trees enter the lower-yielding half of a two-year cycle, according to Cooparaiso, a growers’ cooperative. Colombian output will expand 30 percent to 10 million bags this year, according to the National Federation of Coffee Growers.

At a time of rising Colombian supply, “certainly roasters would consider to some degree going back to using arabica in their blends,” said Galindo of the ICO. “I have a hard time imagining that if the supply of fine arabicas was there to a greater extent, there wouldn’t be demand.”



Coffee Price Forecasts for 2013 4Q:

Arabica

Macquarie    - $1.35/lb    (provided January)
Rabobank     - $1.65/lb    (provided March)
Citigroup    - $1.55/lb    (provided March)
Commerzbank  - $2.20/lb    (provided December)
SocGen       - $1.5937/lb  (provided January)
StanChart    - $1.45/lb    (provided February)

Robusta

Rabobank     - $2,100/metric ton   (provided March)
Commerzbank  - $2,050/ton          (provided December)
StanChart    - $2,100/ton          (provided February)
Macquarie    - $1,950/ton          (provided March)

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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