Coffee roasters used to sit down once a year with retailers to discuss prices. On rare occasions, they sat down twice a year. They are currently holding price discussions almost once a month as wholesale costs spiral.
“I have never seen anything similar in my 25-year career,” says a senior executive.
The cost of Arabica coffee – the high-quality bean appreciated by espresso connoisseurs, has risen to a 34-year high amid a global shortage. During the past 12 months, the cost has surged 145 per cent.
Roasters have responded with a string of retail price increases that have not dented consumption growth, industry executives say. JM Smucker Co, the US company behind the Folgers coffee brand that is seen as the trendsetter in the sector, has raised retail prices three times during the past year.
Last week, it warned that it could increase prices again this quarter if wholesale prices did not fall soon.
Kona Haque, soft commodities analyst at Macquarie in London, says roasters are still not adequately covered and “remain a supportive factor to the rally as they keep buying on dips”. Some traders blame roasters seeking to buy forward supplies and fix prices for the most recent jump in prices.
On the New York ICE, the benchmark May contract surged on Tuesday to $2.784 per pound, the highest since prices hit an all-time high above $3.40 per pound in 1977 after a deep frost destroyed the crop of Brazil two years earlier.
“Next target is $3 per pound,” says a hedge fund manager. But others, including some commodities hedge funds, believe that after the strong rally it is time to take profits.
For years Arabica coffee has been a sleepy niche commodity market, largely handled by roasters such as Nestlé and trading houses, including the Neumann Kaffee Gruppe, in Hamburg, and Volcafe, based in Switzerland. But lately even investors such as pension funds have gained exposure through popular commodities indices such as the S&P GSCI.
The arrival of financial investors has prompted some consumers to complain about speculators. But by and large, roasters, traders and brokers point fingers at the physical market, where a shortage of premium beans is pushing prices sharply higher.
“The continued strength of physical differentials indicates this is very much a physically driven rally,” says James Hearn of brokerage Marex in London.
Unlike the previous four big rallies of the coffee market – in 1975-77, 1985-86, 1994 and 1997, which were triggered after frost hit Brazil’s coffee belt, the current high level has a broader cause. Supplies are struggling in a wider number of countries, while demand is keeping pace. As a result, stocks have fallen to their lowest levels since the International Coffee Organisation started tracking them in the 1960s.
Over the past three years the main driver of the rally has been Colombia, which has suffered a string of bad crops, partly because of heavy rains.
The country’s output plunged to a 33-year low of 7.8m bags, each of 60kg, two years ago. The market was betting that supplies would rise to 10m bags in 2011. But traders have scaled down their forecast to about 8.5m-9.0m bags and some fear it could fall back to the poor levels of 2009.
Mexico has also suffered a bad crop this year because of low temperatures and the world’s largest coffee producer, Brazil, has been causing worries in the market of late.
Traditionally, coffee futures in New York, which track the cost of the top quality washed Arabica, trade above the local BM&FBovespa market in São Paulo.
But domestic Brazilian prices for so-called finer semi-washed Arabicas have surged above those of New York for the first time since the 1990s, a sign that the country’s crop is not nearly as large as previously thought, traders and brokers say.
With stocks at their lowest levels in half a century, the market can ill-afford another supply surprise. Even if prices drop over the short term, as some hedge fund managers believe, the outlook for the next 12-18 months is fairly bullish, they say, as Brazil’s output will drop next year due to the biennial cycle of Arabica coffee production, where an “on” year follows an “off” year, further tightening the global market.
(Source: http://www.ft.com/cms/s/0/26725f62-3ea8-11e0-834e-00144feabdc0.html?ftcamp=rss#axzz1Ej7OSsxL)
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