Coffea arabica, Rubiaceae, Arabica Coffee, Mou...

Image via Wikipedia

Out of Africa

The coffee markets and most particularly the volatile New York market, continue to be dominated by the funds and speculative investment, rather than the fundamentals of supply and demand.   Albeit that there are some commodity investment houses who are having an influence, in their taking physical coffee positions and thus in terms of their hoarding, causing some degree of tightening supply.   This has been a particularly conspicuous issue, with the considerable quantities of Vietnam Robusta coffees that have been sidelined temporarily, from the short term physical coffee market.

In terms of coffee supply and following last years mid year large Brazil crop of approximately 58 million bags, there have been improved crops from the new Colombian main crop, the Central American crops and the new Indian crop which came in during the last quarter of 2010 and the second quarter of this year.    This was aside from a relatively large new Vietnam crop, which was mostly harvested during the last quarter of last year.    The combination of these coffees along with the other producers not mentioned, has dictated a world of coffee supply for the present October 2010 to September 2011 coffee year of approximately 141 million bags, as against world consumption that one would estimate at a maximum of 134 million bags.    This would indicate a surplus of approximately 7 million bags, which shall be carried into the forthcoming lower volume new October 2011 to September 2012 coffee year, into which the presently being harvested new Brazil crop shall be calculated.

Adjoining the new Brazil crop and countering a short term tightening in Colombia coffee supply, there is presently a larger new Peru fine washed Arabica coffee crop that well exceeds 4 million bags in play and there are many industry players now forecasting the record biennially bearing lower new Brazil crop that is in full harvest and might get close to 49 million bags.   This new Brazil crop is approximately 4 million bags lower than the combination of their prevailing export and domestic market demand, but the country did enter this new crop with carry over stocks of at least 6 million bags.

There is something of a dent in world coffee supply, which comes with the rain-affected new Indonesian crop that is in harvest.   This latter new crop is possibly 1.2 to 2 million bags lower than normal, at around 8 million bags.    This should not have such a dramatic effect upon the world coffee supply for the forthcoming October 2011 to September 2012 coffee year, as by the last quarter of this year there shall be not only the larger new washed Arabica coffee crops coming into play from Colombia and Central America, but also a forecast for a much larger new crop from Vietnam.   These crops shall be followed in April next year by what is foreseen to be a recovered larger new crop from Indonesia and unforeseen weather issues aside, a biennially bearing larger new crop from Brazil that shall start to impact by as early as June 2012.   The former improved Colombian, Central American and Vietnam crops shall be calculated in terms of the next October 2011 to September 2012 coffee year, while next years improved production from Brazil and Indonesia, and so far no reason to fear problems for the other producer blocs, should fuel world coffee supply to exceed 141 million bags for the follow on October 2012 to September 2013 coffee year.

Much has meanwhile been said about growing world consumption, with the lead in this respect taken not by the traditional and well developed consumer markets, but by the new developing economies markets and the domestic markets of the producer countries.    This overall growth has over the past few years been in the order of approximately 2 million bags per annum, but while I do not speculate a sharp decline in world consumption, I am of the opinion that growth is temporarily stalled.   This is due to the combination of the dismal economic situations within much of the developed market and rising inflation within many developing markets, against the near to doubling of the coffee prices over the past year.

In this respect one might suggest that the developed consumer markets that account for approximately 77 million bags of coffee consumption per annum and have little in the way of population growth, shall experience consumers tending to take more care of wastage of now relatively expensive coffee and that this might even have the effect of reducing demand, by 2 to perhaps even as much as 3 million bags.    Such a reaction to the rising coffee prices is seen not to come just from the fact that coffee is more expensive, but due to the parallel rise in the general food and energy index, that has caused inflation for the full range of basic foods and fuel and impacts upon disposable income within many countries.

Meanwhile with rising coffee prices and the attractive nature of the export markets, one might expect to see the rise in producer country domestic market off take to slow.   Similarly within many of the new developing consumer markets and with many experiencing general inflation, one can expect to hit something of a price reaction to the now more expensive beverage that is still for many consumers more a fashion statement to be seen consuming coffee, than the habit and perhaps even a cultural addiction, that it is for the traditional market consumers.     One might add that there are many new or developing coffee consumer markets such as Russia, India, China and even Great Britain where coffee as a hot beverage has been making inroads over the recent years into the market share of their traditional high consumption volumes of tea, which must with tea prices static and well discounted to coffee, inspire many coffee converts to return to the more affordable tea for at home consumption.

In conclusion one might suggest that while there is presently no glaring surplus of coffee within world supply, the situation is not as tight as many might suggest and that the speculative factors that have buoyed the reference prices of the New York and London markets, could be seen to be approximately 25% to 30% over done.   This could in the coming year and especially as one enters the second quarter of the year and with the prospects of a large new Brazil crop on the horizon, finally see fundamental reasoning and producer price fixation pressure start to impact upon these markets and result in a negative market correction.    This somewhat longer term bearish view and it is a personal view, assumes near to normal weather conditions to prevail world wide or at least within the tropical coffee growing belt around the world, although weather in these days of global warming, is certainly erratic in nature.   The negative influence of the Pacific La Nina is however past us and for the present, there is no El Nino on the horizon and with these phenomena’s out of the picture, one might think that there shall be some degree of short to medium term stability to the tropical weather patterns.

About Out of Africa

In this blog, our correspondents report on the developments in the International Coffee Markets.

By Lionel de Roland Phillips