Coffee price to stay low bringing growers more woe

by Agrimoney.com

Arabica coffee prices are to remain weak despite falling below the cost of production for most growers, Macquarie said, warning that government efforts to support growers may be encouraging surplus output.

The plunge of more than 60% in arabica coffee futures from their 2011 highs has left prices "below costs of production in most of the key producer regions", the bank said, estimating that beans in Brazil costs some 126 cents a pound to grow, and in Colombia more than 160 cents a pound.

"Costs have been steadily increasing over the past 10 years in Brazil, in line with wage and land inflation, rising input costs and the stronger - up until recently, that is – Brazilian real," Macquarie analyst Kona Haque said.

"Colombia, the world's second-largest arabica producer, has suffered from even higher costs, due to an expensive renovation programme, adverse weather and a strong peso."

'Prices to stay low'

Normally, a fall in prices - which on Thursday hit 116.90 cents a pound in New York for the spot July contract, a four-year low for a spot contract, while the better-traded September lot touched 117.10 cents a pound – below output costs would choke off supplies by making producing uneconomic.

But for coffee, Macquarie warned investors: "Don't export support" for prices.

"Being a perennial crop, production response can be slow," Ms Haque said.

Furthermore, thanks to government support programmes in the likes of Brazil, which this week unveiled a R$3.16bn ($1.4bn) support package for growers, "we continue to see large supplies next season too".

Prices look set "to remain below costs of production for a while longer, until such time that world consumption absorbs the surplus".

'Another huge crop'

Even if producers save costs by cutting back on fertilizers, the legacy of expanded plantings in time of strong prices will support output.

"Coffee trees will continue to yield cherries even with minimal care, so long as weather is benign, particularly as producers are often loath to skimp on nutrient application, as generating a good harvest is part of their DNA," Ms Haque said.

Brazil, the top arabica grower, could be on for "another huge crop" of 55m bags in 2013-14, a rise of 2m bags year on year, simply because of it being an "on" year in the two-year cycle of higher and lower producing years.

"There are murmurings that today's low prices are encouraging some [Brazilian] producers to consider moving some of their coffee land into cattle - though interestingly not sugar cane or oranges, both of which compete for land, but where prices are equally negative," she said.

However, the prospect of government support "is another argument why we do not see a drop in [arabica] production next season, despite prices falling through Brazilian costs of production."

Arabica coffee for September stood 2.0% higher at 120.70 cents a pound in lunchtime deals in New York.

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