Coffee prices to surge to $3 a pound - and beyond

Coffee prices are on their way to $3 a pound – and beyond, a veteran analyst has said, terming the market the "hands down favourite" among soft commodities to extend its rally.

The rally in coffee prices - which on New York's futures market hit a 13-year high of 268.40 cents a pound on Friday, double their price a year ago - had been insufficient so far to ease the squeeze in the market.

The "day of reckoning" when futures hit 300 cents a pound for the first time since May 1997 was "fast approaching".

And there were few clues as to what might slow prices even then, ahead of output lift expected in 2012-13, an "on" season in the cycle of higher and lower output years in Brazil, the top producer.

"That's the troubling part. I just don't know what will cause the brakes to be put on this rally expect for the prospects of a bumper crop in 2012-13," Judith Ganes-Chase said.

"But that doesn't even start to blossom for another nine-to-10 months."

Colombian setback?

Demand for arabica coffee was proving resilient, even at current prices, as shown by the premium buyers were willing to pay for better grades of washed beans.

"Until there is some relief in the cash market, the futures market is not likely to see much of a pullback," said Ms Ganes-Chase, head of Ganes Consulting, who has nearly 30 years' experience in soft commodities.

Meanwhile, supplies would remain suppressed by 2011-12 being an "off" year for Brazil and, potentially, by further hiccups in Colombia, the second-ranked arabica producer, if the La Nina weather pattern lingers into the second quarter of the year.

"La Nina could still impact the flowering of the 2011-12 main coffee crop if rains are too heavy again in March and April… knocking blossoms to the ground prematurely," she said.

Arabicas vs robustas

And this time there was limited scope for roasters to reweight blends towards robusta beans, the cheaper coffee variety traded in London, as they did in the last major rally, in 1997.

While robusta beans were, once more, at a steep discount to arabicas, roasters "never switched back, so flexibility is more limited now than before", Ms Ganes-Chase said.

"The futures market certainly pas potential keep powering higher, with supplies only expected to get tighter and tighter in the months and seasons ahead."

(Source: http://www.agrimoney.com/news/coffee-prices-to-surge-to-$3-a-pound---and-beyond--2841.html)