Coffee breaches historic $3 level

Coffee prices have broken through the psychologically important $3 a pound level for the first time in more than 34 years as roasters scramble to secure scarce supplies of Arabica beans and investors continue to pour money into the niche commodities market.

The surge to more than the important threshold, which is likely to trigger another round of retail price increases, takes place only days after the International Coffee Organisation, the producers and consumers group, warned that the tight market continued to “support high price levels”.

The London-based group added that inventories – currently at their lowest level for 50 years – were unlikely to build up this year.

But brokers also said that strong investment flows were behind the latest leg of the coffee rally and warned of an abrupt price correction when speculators decide to take profits.

Analysts and traders said that supplies of Arabica coffee, the high-quality bean, are tight due to lower-than-expected crops in top producer Colombia and several other nations. 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, after rising to 8.9m bags in 2010.

But traders have scaled down their forecast to about 8.5m-9.0m bags. The National Federation of Coffee Growers of Colombia forecast a crop this year of only 9.5m bags, down from the 11m-12m bags range common in the early 2000s.

Mexico has also suffered a bad crop this year because of low temperatures, and several Central American countries have also experienced problems. The world’s largest coffee producer, Brazil, has been causing worries in the market of late due to lower-than-expected production of medium-quality beans.

Brokers said that so-called origin selling was almost non-existent, an indication that either supplies are low or farmers are hoarding, betting on higher prices in the near term.

The lower-than-expected crops come as demand remains robust, particularly in producing countries such as Brazil, impeding a build up in global inventories.

In New York, ICE July Arabica coffee surged to a session high on Wednesday of $3.0250 a pound, the highest level since prices hit a peak above $3.40 per pound in 1977 after a deep frost had destroyed the crop of Brazil two years earlier.

Unlike the previous four big rallies of the coffee market – in 1975-1977, 1985-1986, 1994 and 1997, which were triggered after frost affected Brazil’s coffee belt, the world’s top growing region, the current high level has a broader cause.

Arabica coffee prices have surged 23.6 per cent to date this year and a hefty 117.2 per cent since January 2010. The rapid surge has forced roasters and retailers to pass onto consumers some of the wholesale price increase.

JM Smucker, 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. The company has warned it would do so again if wholesale prices did not fall soon, something traders do not anticipate.

(Source: http://www.ft.com/cms/s/0/ab49816a-6b72-11e0-a53e-00144feab49a.html?ftcamp=rss#axzz1K6mBVJBg)