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by Jonathan Feuer, President LMZ,
March, 2012
Having just returned from the NCA Convention, and having spent 4+ days meeting with industry leaders from the US, Centam, Asia and Europe, it would be reasonable to presume that some form of consensus view or, at least likely scenario for the coffee "market" going forward through 2012 and into next year, would emerge.
However, no such viewpoint was evident, and in fact more long time industry participants and sages expressed "a total lack of conviction about direction" along with their conflicting indicators and competing opinions.
We posed the question to many as follows: Where do you think the arabica market will be 60 days from today, and where do you think the robusta market will likewise be? Higher, level or lower ?? Predictably, there were opinions expressed to support all six of the possible responses, but most notably there was an unusually wide range of opinions meant to support their particular argument. And some of the best informed, longest standing trade participants among producers, roasters, analysts and trade alike expressed real confusion about market direction going forward. There is simply no clear picture. Some of the reasoning:
BULLISH
• deficit: a fundamental numerical supply/demand deficit of at least 5 million bags (close to 4% of consumption) in the '13-'14 coffee year absent any supply calamities
• steady supply: arabica supply to the global market is projected to be as short as 3 weeks at various points in the upcoming year
• consumption: has shown no material signs of suffering during and post the sharp price rise period of the past 2 years. Growth paused, then resumed its usual uptrend.
• economics: point to tighter coffee supply because at $1.75/lb green arabica coffee prices, production of coffee is unattractive relative to other cash crops at origin
• comparably: coffee is still a cheap beverage for the consumer relative to its alternatives, and consumption has shown itself to be steady despite price increases
• quality: demand trend is still up-market on the quality spectrum, so forecast is that more consumer's mouths will be chasing scarcer arbica coffee
• cost of production: has increased significantly during the past 5 years as petroleum, fertilizer, irrigation and land cost have risen across the producing world
• carryover stocks: are tighter than ever since the large drawdown of 2008-1010
• US dollar: Fed policy is keeping the USD low for the forseeable future, therefore exports from producing countries will remain under upward pressure
• marked increases: in consumption in producing countries and in Asia. As an example please note Brazil will pass USA as world's largest consumer in the next 1-2 years.
BEARISH
• commodity play: is cooling now as an asset class favored by speculators and hedge funds. It is estimated that 25% of the recent market top of $3.04 was attributable to "hot money"
• Brazil crop: is now consensus estimated at around 56 million bags and should relieve pressure and fill supply holes. This factor is "up for grabs".
• technical factors: may come into play now that prices for arabicas have fallen and the technical traders and speculators may attempt to take the market lower
• arbitrage: between arabica and robusta coffees must continue to narrow (arabicas coming down and robustas going up further) based on changes in usage and demand for the two types.
• single-serve: coffee eliminates the hidden waste of pot brewing, and as actual coffee usage is now more precise, demand will naturally fall to a new norm, and this category is surging.
SOLUBLE
• irrespective of origin, the underlying price of soluble is based on robustas, and robustas have been, and are forecast to be firm to higher in price
• Colombia's difficulties with shortfall in Colombian green coffee will remain in place though 2012 at minimum, then improve slowly
• Currency is the big question in Brazil, and if the exchange rate cooperates, Brazil's will be more competitive than recent years – relative to other origins
• the market is showing a tendency to bifurcate: higher prices for the better qualities, lower prices for the average qualities, and much less of a middle range.
• with robustas likely to remain firm and arabicas having a 50%+ chance of going higher, some coverage is probably a good idea against known requirements for the year.
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