Global Coffee Market Prepares for Record Espresso-Bean Jolt: Commodities

Production may climb for a fourth year, gaining 2.3 percent to 55.98 million bags (3.36 million metric tons) in 2011-2012, Rabobank International predicts. More supply will create the biggest glut in at least four years, according to Macquarie Group Ltd. Prices that already fell 9 percent this year will drop a further 8.3 percent to $1,750 a ton by June 30, the lowest level since October 2010, the median estimate in a Bloomberg survey of 13 traders showed.

Robusta surged 62 percent in London trading in 2010 as record demand created the first shortages in at least three years, according to Macquarie. Supply is now expanding amid mounting concern that Europe’s debt crisis will derail the global economy. Coffee sales fell for the first time in seven years in 2009 as nations contended with recessions, according to Euromonitor International Ltd., a London-based research group.

“We have record world production and I’m not optimistic on demand,” said Judith Ganes-Chase, a former Merrill Lynch & Co. analyst who is now the president of Katonah, New York-based J. Ganes Consulting LLC. “We’ll probably need to say goodbye to the bull market for a while.”

Annual Decline

Robusta is on track for its first annual decline since 2009 on NYSE Liffe in London and last traded at $1,908. Arabica fell 9.1 percent toiGnhApbPIAVw$2.1865 a pound this year on ICE Futures U.S. in New York. The Standard & Poor’s GSCI gauge of 24 raw materials fell 0.9 percent as the MSCI All-Country World Index of equities dropped 12 percent. Treasuries returned 9.7 percent, a Bank of America Corp. index shows.

Vietnam, the biggest robusta grower, will reap 21.25 million bags this season, 9 percent more than a year earlier, according to a Bloomberg survey of 10 traders, growers and exporters. Each bag weighs 60 kilograms (132 pounds). The Indonesian crop may expand 33 percent to 8.3 million bags in the harvest from April, the biggest gain since 1996-1997, a separate survey of eight traders, roasters and exporters showed.

Farmers in Brazil, the second-largest grower after Vietnam, may gather 15 million bags or more from the harvest in 2012, according to Guilherme Braga, the head of the Cecafe Brazil Coffee Exporters Council. The nation produced 14.5 million bags from the last crop, the U.S. Department of Agriculture estimates.

Debt Crisis Widens

Global robusta output will exceed demand by 2.5 million bags this season, compared with a 700,000-bag shortage last year, Macquarie estimates.

Expanding robusta harvests contrast with an anticipated shortage in the arabica variety favored by Seattle-based Starbucks Corp. (SBUX), after the heaviest rains in two decades damaged Central American plantations. Arabica demand will exceed supply by 7 million bags this season, equal to a year of Japanese consumption, according to Volcafe, a unit of ED&F Man Holdings Ltd. That spurred 13 traders and analysts surveyed by Bloomberg last month to predict a 24 percent jump in prices by March.

The euro region is probably already in recession, Larry Kantor, the head of research at Barclays Capital in New York, told Tom Keene on Bloomberg Television’s “Surveillance Midday” on Dec. 9. European Union nations consumed 40.74 million bags of coffee last year, accounting for 56 percent of demand from importing members of the International Coffee Organization, data from the London-based group show.

Retail Sales

Global retail coffee sales fell 1.8 percent in 2009 amid the worst recession since World War II, according to Euromonitor International. Sales will increase 5.6 percent to $61.5 billion this year, the research group estimates. Nestle SA (NESN), based in Vevey, Switzerland, had the biggest market share last year at 22 percent, the data show.

Arabica now costs $1.32 a pound more than robusta, compared with an average of 86 cents over the past four years, data compiled by Bloomberg show. That may encourage roasters to use more robusta in instant drinks to curb costs, said Keith Flury, an analyst at Rabobank in London.

Consumer confidence in the U.S., the biggest coffee- drinking nation, held at a level typically reached during past recessions in the week ended Dec. 4, the Bloomberg Consumer Comfort Index showed Dec. 8. Consumer confidence in Brazil, the second-largest coffee market, strengthened for three consecutive months, the National Industry Confederation estimates. Its gauge is still 5 percent lower than a year ago.

‘One Cup’

“In an environment where the economy is weak, people might forego that one cup of coffee a day,” said Abah Ofon, an analyst at Standard Chartered Plc in Singapore whose second- quarter robusta forecast was within $1 of the actual price.

Hedge funds and other money managers are betting on further declines in robusta. They held a net-short position of 6,263 contracts in the week ended Dec. 6, and have been bearish since the end of October, data from NYSE Liffe show. Speculators in arabica had a net-long position of 14,157 futures and options in the week ended Dec. 6, and have been bullish since August, data from the Commodity Futures Trading Commission show.

Lower robusta prices may help contain costs for Nestle, the maker of Nescafe and Nespresso, which told investors Oct. 20 that its raw-material costs would jump as much as 3 billion Swiss francs ($3.2 billion) this year.

Million Bags

Production of robusta is likely to keep expanding. Output in Vietnam could reach 28.3 million bags by 2020, Jonathan Clark, the general director of Dakman Coffee Exporters, told a conference in Ho Chi Minh City on Dec. 9. The Buon Ma Thuot, Vietnam-based company is a venture between ED&F Man and state- owned Simexco Daklak.

Brazil’s harvest may advance about 50 percent in the next decade, said Braga of the Cecafe Brazil Coffee Exporters Council.

“On the robusta side, it’s very likely that we will see record production in Vietnam and this may weigh on prices,” said Lysu Paez, the Paris-based analyst at Natixis SA who correctly forecast a surge in robusta prices at the start of August, when they jumped 12 percent. “Fundamentals of arabica are going to be pretty tight on the supply side.”


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