Coffee Supply Curbed by Weak Dollar as Demand Gains

Coffee cherries sit in a basket ready for sale in Yirgacheffe, Ethiopia, on Dec. 8, 2007. Photographer: Michael Tsegaye/Bloomberg News

By Aya Takada
Bloomberg


March 13, 2008

Global coffee supply will be curbed by the dollar's decline against the currencies of producing countries and by increasing costs as consumption gains, the International Coffee Organization said.

Rising coffee prices are failing to boost planting because the weakening dollar erodes the value of sales in local-currency terms and record crude oil boosts fertilizer and transport costs, said Nestor Osorio, executive director of the London-based group. Consumption increases 1.7 percent to 2 percent a year, he said.

Supply constraints may raise prices of coffee, which gained to a 10-year high in New York last month, adding to costs for roasters including Starbucks Corp., the world's largest chain of coffee shops, and Doutor Nichires Holdings Co., the biggest in Japan. An index tracking the dollar against six major currencies fell to a record today. Oil gained 89 percent in the past year.

``Coffee stockpiles are very low, and might be drawn down further if production fails to keep pace with demand,'' said Takaki Shigemoto, an analyst at Tokyo-based commodity broker Okachi & Co. ``Coffee prices in New York will likely top the 10- year high if output in Brazil is smaller than expected.''

Coffee for May delivery added 1.3 percent to $1.5395 a pound yesterday on ICE Futures U.S., formerly known as the New York Board of Trade. The price reached a 10-year peak of $1.719 Feb. 29 and is up 39 percent in the past 12 months.

May-delivery Coffee on London's Liffe exchange rose 3.6 percent to $2,652 a metric ton yesterday after reaching $2,815 on March 6, the highest since July 1995.

Asia, Africa

ICE contracts are for arabica beans, grown mainly in Latin America and used in coffee shops. London trades robusta beans, used for instant coffee, and produced mostly in Asia and Africa.

``Because of the depreciation of the dollar and costs derived from high prices of oil, there is not enough money to invest in new plantations,'' Osorio said in an interview in Tokyo yesterday. ``I don't see any increase in planted area.''

Global coffee consumption will rise to 124-125 million bags this calendar year from about 123 million bags last year, as demand gains by almost 2 million bags every year, he said. A bag weighs 60 kilograms or 132 pounds. Consumption has not been affected at all by high prices, Osorio said.

Stockpiled coffee in the 48 producing countries was no more than 20 million bags, while inventories in importing countries were about 25 million bags, Osorio said.

``Historically speaking, stocks are at the lowest level ever,'' he said. ``Given the fundamentals, and the situation we are seeing, the current level of prices could be sustained.''




Global Production

Global coffee output in the year ending Sept. 30, 2008, will be 117.8 million bags, compared with the 116.4 million bags forecast in January, the ICO said in a report on its Web site March 11. Output was 125.6 million bags last season.

Coffee production in the year ending September 2009, when trees in Brazil, the world's largest producer, enter the better- yielding half of a two-year cycle, was forecast at 123-126 million bags, according to the ICO.

The Brazilian crop would be between 41 and 44 million bags, with about 28-29 million bags exported, Osorio said. Brazil produced 33.7 million bags from the crop harvested last year.

Brazil, the second-largest coffee consumer, is the fastest- growing market for the commodity and may overtake the U.S. to take the top demand ranking, Osorio said.

``They are planning to get to 20 million bags of consumption for the year 2010,'' he said. ``They are growing at the level of almost 700,000 to 800,000 bags per year.''

To contact the reporter on this story: Aya Takada in Tokyo atakada2@bloomberg.net

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