Why global coffee prices are soaring?

by Sreekumar Raghavan

Adverse weather in growing regions, rising consumption in exporting countries and tight supplies have created a situation where coffee prices are witnessing record highs in futures markets.According to International Coffee Organisation (ICO), in March the monthly average of the ICO composite indicator price rose by 3.8%, from 216.03 in February to 224.33 US cents/lb, the highest level in 34 years. The price increase was marked in the case of Robusta, reducing the differential with prices of Other Milds by 2.6%.

Meanwhile in futures market, Arabica coffee rose to the highest price in almost 14 years as adverse weather threatened crops in Colombia, the world’s biggest producer after Brazil, according to Bloomberg. Arabica coffee for July delivery rose 1.05 cents, or 0.3 percent, to settle at $3.0615 a pound on ICE Futures U.S. in New York. Earlier, the price touched $3.089, the highest since May 1997, the report added. In London, robusta-coffee futures for July delivery rose $56, or 2.2 percent, to $2,611 a metric ton on NYSE Liffe.

World coffee exports amounted to 10.45 million bags in March 2011, compared with 8.74 million in March 2010. Exports in the first 6 months of coffee year 2010/11 (Oct/10 to Mar/11) have increased by 15.4% to 52.9 million bags compared to 45.8 million bags in the same period in the last coffee year. In the twelve months ending March 2011, exports of Arabica totalled 67.3 million bags compared to 59.9 million bags last year; whereas Robusta exports amounted to 33.7 million bags compared to 34.1 million bags

Crop year 2010/11 is still underway in many exporting countries and production is estimated at 133 mn bags, representing 8.1% rise over previous year. Crop year 2011/12 has begun in Brazil, Indonesia, Papua New Guinea and Peru. In Columbia, coffee plantations ahve been damaged by rain and landslide; adverse weather will continue to impact the region's coffee output.

The market fundamentals for coffee continues to remain tight, according to ICO. Volume of opening stocks in crop year 2010/11 was 13 mn bags, inventories held in importing countries were estimated at 18.3 mn bags as of December, 2010. World consumption of coffee has grown to 134 mn bags as against 130.0 mn bags in 2009.Coffee consumption is growing rapidly in exporting countries of Brazil, Ethiopia and Vietnam while consumption at traditional importing nations is growing at a slower rate, notes ICO.However, compared to 2009 an increase of 1.6% in consumption has been recorded in the European Union and the United States of America in 2010. Other importing countries including Canada and emerging markets have recorded an increase of 3.3% in 2010. The average annual growth rate of world consumption during the last ten years is around 2.4%.

In India too the crpo situation is no different with production of both arabica and robusta lower in the 2010-11 crop season. According to Coffee Board, the post monsoon crop forecast for the year 2010-11 is placed at 299,000 MT, which showed a reduction of 9,000 MT (2.92%) over the previous post blossom estimate of 308,000 MT. The arabica and robusta break up is 95,000 MT and 204,000 MT respectively. Arabica production has shown a decline of 4,500 MT (4.52%) while robusta also declined by 4,500 MT (2.16%) over the post blossom forecast. The majority of the decline in production is attributed to Karnataka state (87%) alone while Kerala contributed 12%.

Meanwhile analysts have pointed out that the rally in ICE arabica coffee could be speculative and not based on fundamentals considering some recent export figures. Some traders expect some sell-off before prices approach 14-year high of $3.18 a pound.

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