Friday, September 6, 2013

Brazil highlights tale of two markets in coffee


Brazil highlights tale of two markets in coffee

The International Coffee Organization highlighted the continuing drop in the premium of arabica coffee over robusta even as researchers flagged stark differences in supplies of the two beans in the important market of Brazil.

While prices of all major coffee types fell last month, the "significant" decreases in values of arabica coffee, generally deemed of higher quality, continued to outstrip that of robusta.

Colombian milds proved the worst performer, with values falling 2.9%, compared with a 1.3% drop in robusta prices, and encouraged by a recovery in Colombia's arabica coffee production.

The ICO said: "The arbitrage between arabicas and robustas narrowed in August," reaching its lowest levels since 2008.

'Firm demand'

The comments came as Cepea, the agricultural research centre linked to Sao Paulo University, highlighted the tighter supplies of robusta coffee than arabica in Brazil - the top coffee producing country (mainly arabicas) and second-ranked consumer.

A Brazilian robusta market characterised by only "small changes" in prices since March, contrasting with continued declines in arabica values, "is mainly related to the firm demand from Brazilian roasters", Cepea said.

While the ICO last month flagged signs that a smaller premium was encouraging Brazil's roasters to reverse a decade-long trend and switch back to arabica coffee, they were still using 40-45% robusta in their blends, Cepea said.

A decade ago, that proportion was 15%.

'No product left available'

Meanwhile, analysts are downgrading ideas of supplies of robusta beans thanks to ideas that the crop in Espirito Santo, which produces more than 75% of the domestic robusta crop, "may be lower" than the official forecast of 9.25m bags.

"The smaller production this season is also an aspect that has been underpinning quotes," Cepea said.

Furthermore, as for the last harvest, "agents say that there is no product left available to be traded", with 20-30% of the current crop sold.

Such dynamics are in sharp contrast to those of arabica beans.

Brazil's arabica supplies are so ample – buoyed by a strong carryout from last year's record harvest, and this year's strong 36.4m-bag crop – that the government has, besides introducing a price support programmes, backed loans to help farmers store crop and slow the weight of sales on values.

Negative margins

The ICO's comments came in a monthly report in which it nudged down by 100,000 bags to 14.4m bags its estimate for world coffee production in 2012-13, although still representing a surplus over consumption of some 142m bags.

The organisation also dented hopes that weaker currencies in many producing countries, such as Brazil and India, had brought many producers back into profit, by implying raised local values for coffee, which is traded in dollars.

"A weaker currency can encourage greater selling by exporting countries, thus increasing availability in the market and putting further downward pressure on prices," the ICO said.

"Although changes in the exchange rate could potentially increase the price paid to growers in domestic currency, it will also increase the cost of inputs which are imported in US dollars.

"As a result, particularly given the significant decreases in coffee prices over the last two years, current market levels are still believed to be below the cost of production."

The ICO has cautioned over huge social impact from weak profitability of a sector which is a major rural employer in many coffee producing countries.

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