Coffee squeeze may yet drive prices to record high

by Agrimoney.com

The rally in coffee prices could last for at least another season, and take out records set in the 1970s, driven by a market squeeze that will drive supplies to their tightest in 50 years, Rabobank said.

The tightness in the market for arabica coffee, traded in New York, which has already driven prices to 34-year highs looks set to increase further in 2011-12, as robust demand encounters a falling supply of the beans.

That will be an off-year in the two-year production cycle in Brazil, the top grower, leaving world output of arabica beans – generally considered the better quality coffee type – down 7.4% at just under 78m bags.

Although stocks are set to rebuild somewhat in the current season, "the surplus built up is not expected to be sufficient to counter the lower production expected in 2011-12", the bank said a report.

'Significant upside risk' 

"As demand growth will continue, we expect the stocks-to-use ratio for 2011-12 to be the lowest for the last half a century, resulting in high prices and continued competition for beans."

The report added that "significant upside risk" remained for prices, even after a doubling in the past year.

"If production is threatened by weather, prices could take out the record set in the 1970s."

Changing tastes 

The market tightness has been spurred by years of modest growth in arabica output, and little prospect of a significant uptick given the time needed for coffee trees to establish.

Meanwhile, demand for the beans has shown a significant increase, in line with a taste for upmarket coffee, such that even a 25% rise in prices of some US brands over the last nine months is not expected to dent consumption much.

Indeed, US demand is expected to remain flat in 2011-12 and grow by 2.0% in the European Union, while hitting 2.8% in Brazil, which is closing in on America as the top consumer of the beans.

"The growing demand comes despite the higher price tags," Rabobank said.

"The consumption of coffee was very resilient during the financial crisis, and we believe it will continue."

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