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As Coffee Prices Decline, Investors Brace for More

Coffee prices have tumbled 20% this year, capping the biggest two-year plunge in a decade and highlighting commodity markets’ struggle with a supply deluge.

Global coffee output is soaring, the result of more acres dedicated to coffee and the widespread adoption of more productive and sturdier plants. Growers from Colombia to Ethiopia made decisions to boost production more than three years ago, when prices were rallying.

Now, the $6.1 billion futures market for arabica, a mild-tasting variety that is used mostly in high-end brews and accounts for the majority of global coffee production, is grappling with the consequences.


On Monday, prices for arabica coffee fell 1.65 cents, or 1.4%, to $1.1470 a pound on ICE Futures U.S. Barring an unprecedented spike on Tuesday, the last trading day of the year, coffee will end the year in negative territory, as it did in 2011 and 2012.

Coffee prices haven’t fallen for three consecutive years since the early 1990s.

Since 2011, coffee prices are down 49%. That is the largest two-year decline since 2000-2001, when prices fell 63%.

Investors have bailed out of bullish bets and as a group are betting for prices to keep falling, according to Commodity Futures Trading Commission data. Protests in Colombia, the world’s No. 2 arabica grower behind Brazil, have erupted, with farmers facing falling incomes demanding more government support.

Meanwhile, retail prices for bagged coffee and lattes have stayed relatively steady, a boon for roasters and food companies that are able to capitalize on lower coffee costs.

The sharp fall in coffee prices is the most prominent example of the oversupply situation that has beset many commodity markets, weighing on prices and turning off investors. Mining companies are ramping up production in some copper mines, U.S. farmers just harvested a record corn crop, and oil output in the U.S. is booming. The Dow Jones-UBS Commodity Index is down 8.6% year to date.

In the season that ended Sept. 30, global coffee output rose 7.8% to 144.6 million bags, according to the International Coffee Organization. A single bag of coffee weighs about 60 kilograms (about 132 pounds), an industry standard. Some market observers believe production could rise again in 2014.

“I don’t think we’ve seen the absolute low for prices,” said Sterling Smith, a futures specialist at Citigroup. “There is a strong possibility that we will see record production in a new crop of coffee.”

The U.S. Department of Agriculture forecasts that global coffee stockpiles will rise 7.5% to 36.3 million bags at the end of this crop year, an indication that supplies are expected to continue to outstrip demand in the next several months.

Brazil, which grows about a third of the world’s coffee, is headed for what is known as an “on-year” crop next year. The productivity of the country’s coffee trees alternates between high- and low-output years.

In a research note, analysts at Macquarie Group warned investors that a potential bumper Brazilian crop could push coffee prices lower. The analysts said the country’s coffee-growing regions were experiencing weather that was conducive to good development of coffee cherries.

The global coffee glut has its roots in a price rally more than three years ago. Farmers across the world’s tropical coffee belt poured money into the business, spending more on fertilizer and planting more trees as prices reached a 14-year high above $3 a pound in May 2011.

Three years ago, José Eliuth Muñoz Manrique and thousands of other Colombian coffee farmers ripped out trees that were ravaged by a fungal disease to plant a heartier and more productive variety. “It was a very serious mistake,” said Mr. Muñoz, a third-generation coffee farmer in El Tambo, in Colombia’s southwestern highlands.

Now Mr. Muñoz and other growers are shifting back to plants that are less productive but yield coffee types that command a higher premium. It is a nascent sign that farmers throughout the coffee belt are scaling back as prices fall below the cost of production in some areas. That could mean thinner supplies of beans in coming years and higher prices.

“You’ve got to look at it long term,” said Hector Galvan, a senior broker at R.J. O’Brien, a Chicago brokerage. “The second we start talking about expectations of a worse yield, you see the market start bouncing.”

Coffee prices recently have rebounded, albeit from seven-year lows. Prices are up 13% since early November.

Hedge funds and other money managers in November held the biggest net position that coffee prices would fall since at least 2006, according to the CFTC. They have since scaled back those bearish bets. In the week ended Dec. 24, investors held the smallest bearish position since May, at 9,610 contracts.

Still, some analysts said the recent optimism could peter out once Brazil’s next crop hits the market in June. Rabobank, a Netherlands-based bank with a strong presence in global agriculture, estimates that prices could fall to 95 cents by the fourth quarter of 2014.




Coffee Has Third Straight Annual Drop, Longest Slump in 20 Years

Coffee futures fell, capping the longest run of annual declines since 1993, on concern that a global glut will increase as crop conditions improve in Brazil, the world’s biggest producer and exporter of arabica beans.

Widespread rain in the next several days in Brazil’s Sao Paulo and Parana states will aid plants by increasing soil moisture, MDA Weather Services in Gaithersburg, Maryland, said yesterday in a report. The nation’s crop will reach 49.2 million bags, higher than a previous estimate of 47.5 million, Conab, the government’s forecasting agency, said on Dec. 20.

Global production is set to exceed demand for the fourth straight season, pushing inventories to a five-year high, according to the U.S. Department of Agriculture. The glut is helping to cut costs for Starbucks Corp. and Green Mountain Coffee Roasters Inc.

“There’s just too much coffee around,” Michael K. Smith, the president of T&K Futures & Options Inc. in Port St. Lucie, Florida, said in a telephone interview. “A better crop outlook in Brazil is certainly pushing prices lower.”

Arabica coffee for March delivery fell 3.5 percent to settle at $1.107 a pound at 2 p.m. on ICE Futures U.S. in New York, the biggest drop for a most-active contract since Nov. 22. This year, the price tumbled 23 percent, the third straight annual decline. The commodity plunged 54 percent since the end of 2010.

Global Output

Global production, including the robusta variety that accounts for about 42 percent of supply, will exceed demand by 6.04 million bags in the 2013-2014 season, compared with a surplus of 11.06 million a year earlier, the USDA said this month. Inventories will reach 36.33 million bags, the highest since the 2008-2009 season. A bag weighs 60 kilograms, or 132 pounds.

Arabica, grown mainly in Latin America, is brewed by specialty companies including Starbucks. (SBUX:US) Robusta, used in instant coffee, is harvested in Asia and parts of Africa.

Robusta futures for March delivery fell 0.6 percent to $1,683 a metric ton on NYSE Liffe in London. This year, the price dropped 13 percent after climbing 6.3 percent in 2012. Vietnam is the biggest producer, followed by Brazil.

The arabica premium to robusta averaged 42.41 cents a pound this year, down from 84.16 cents in 2012.

On Dec. 9, the premium fell to 27.95 cents, the lowest since Oct. 7, 2008.


Coffee farmers face lower earnings as global prices drop

Future coffee production in Uganda is threatened by the decline in global prices, with the prices of all four group indicators sliding rapidly over the course of November. Experts in the industry say that the low prices are likely to discourage farmers in producing countries like Uganda from investing in coffee. This scenario might lead to drop in production volumes. The indicators include: Composite Indicator, Colombian Mild’s, Brazilian Natural and Robustas. Latest statistics from the International Coffee Organisation (ICO) show that the composite indicator price averaged 107.03 US cents/ per pound in October 2013 , posting a 4.3 per cent decrease in September, its lowest level since March 2009 . Furthermore, the composite indicator is now below its level of January 2000 when the ‘coffee crisis’ started. EICO report shows: “The monthly average of the International Coffee Organisation composite indicator price now stands at its lowest level since March 2009 , and the severe downward trend observed over the last two years shows no sign of slowing.” Price movements”In many countries, the prices received by coffee growers fail to cover the unit costs of production while at the same time the prices of basic goods, such as food and energy are rising,” the ICO report notes. Experts have indicated that coffee is the worst performing agricultural commodity of the last two years, with a downward trend that has so far shown no sign of improving. ICO report notes: “All four group indicators fell sharply over the course of the month, Colombian Milds dropped by 3.4 per cent, Other Milds by 2.7 per cent and Brazilian Naturals by 2.7 per cent, to their lowest levels since December 2008 , March 2009 and July 2009 , respectively.” The most significant decline was observed in Robustas, which fell by 4.6 per cent to 83.7 US cents per pound, their lowest level in three years fell by 18.8 per cent to 5.13 US cents/ per pound, the narrowest gap in five years. This is indicative of the increased supplies coming out of Colombia compared to Central America . The arbitrage between the New York and London futures markets, on the other hand, widened by 4.6 per cent to 43.58 US cents/ per pound, but is still relatively low compared to the last four years. Uganda’s status According to a report from Uganda Coffee Development Authority (UCDA), the situation at the local scene is not different from the international table as prices have also dropped. The UCDA counter Kiboko as at last week shows that coffee was trading between Shs1,200 and Shs1,500 per Kilogramme, down from Shs2,000 to 2,300 per kilogramme it sold in October.

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