Anticipated Record Crop From Brazil and Faltering
Consumption Pressure Prices
By
Carolyn Cui
July 1,
2012
In the midst of global economic uncertainty,
commodities fell broadly in the second quarter on concerns over weak demand.
Among them, coffee took a hard hit, with prices off 6.8%, a move that has
jolted a commodity long considered recession proof.
Coffee has been under pressure on all fronts for
months. Prices have been falling all year in anticipation of a record crop from
Brazil, the world's biggest coffee grower. Moreover, demand has been sluggish,
as roasters held off on buying premium beans, and consumers in some markets
reduced coffee drinking.
During the second quarter, coffee prices fell 12.35
cents, to $1.701 a pound, on the ICE Futures U.S. exchange. Prices rebounded
slightly toward the end of June but still are 44% off from a peak of $3.049 hit
in May 2011. Year to date, coffee is down 25%.
"Coffee was really hammered by a number of
bearish factors," said Keith Flury, senior commodity analyst at Rabobank.
The global economy slumped in the second quarter
in part due to the worsening debt crisis in Europe, where 13 countries are
officially in recession. Elsewhere, China's economic growth slowed and the
economic recovery in the U.S. remained sluggish.
Coffee's plunge this year suggests that nothing
can entirely escape the economic headwinds. The conventional wisdom for
commodity investors is that coffee demand would stay resilient through economic
cycles, as nobody would give up a cup of joe even when times are hard.
"What [investors] didn't realize is that
when you have multiyear-high prices, combined with dire economic growth, then
consumers start to make choices," said Kona Haque, head of agricultural
commodities research at Macquarie Bank Ltd.
As the European debt crisis intensified, coffee
demand faltered in some countries. British drinkers cut back on coffee
consumption by 6.7% in 2011, while demand fell 2.6% in Spain and 1.6% in Italy,
according to preliminary data from the International Coffee Organization.
Globally, consumption still increased 1.7% in 2011, slowing from the average
annual growth of 2.5% since 2000. Data for 2012 aren't available.
Premium, or arabica, beans were hurt by changing
consumer tastes. As prices on the ICE Futures U.S. exchange more than doubled
from 2010 to 2011, some coffee roasters and drinkers began to shift from
arabica to lower-quality beans, or robusta, in an effort to stay profitable or
lower expenses. In the 12 months ending in May, arabica exports have fallen
6.1%, while robusta exports have risen 6.8%, according to the International
Coffee Organization.
Robusta, a smaller contract traded on NYSE Liffe
in London, rose 3.5%, to $2,103 a metric ton, in the second quarter. For the
year, it is up 19%. Robusta contains twice the caffeine of arabica and tastes
stronger.
The price moves have drawn many financial
participants into the coffee market. For arabica, net-short positions, or bets
that prices would fall, held by index funds and hedge funds, reached a record
during the second quarter, U.S. government data showed.
Bearish fundamentals "have made their views
on coffee even more negative, driving this market lower and lower. Other
agricultural commodities haven't had this kind of negativity," Ms. Haque
said.
Since the end of last year, the size of this
futures market has soared as much as 55% in terms of open interest, or number
of futures contracts outstanding, before falling 15% in recent days, according
to ICE Futures U.S. Prices, accordingly, have rebounded recently. It has been
caused by "aggressive parties covering shorts," said Stan Dash, vice
president at TradeStation Securities, an electronic brokerage, referring to the
practice of buying back contracts to cover short positions as prices rise.
Prices of arabica are likely to find a bottom
during the Brazilian harvest, which started in May and will last until
September.
This year's crop is estimated to be the largest
ever for Brazil, which accounts for about one-third of the world's production.
Brazilian farmers had expanded plantings and increased the use of fertilizers
in response to last year's high prices. But many are holding off from selling,
waiting for prices to recover.
"I believe Brazilians will start to sell in
the next two or three months. By around September, you will start to see the
market start bottoming out," said Ms. Haque, who took a trip to Brazil in
May. Her price target for arabica is $1.80 a pound by year-end. Rabobank's Mr.
Flury expects arabica prices to reach $1.70 in the fourth quarter, citing
roasters' need to replenish dwindling stocks. Globally, coffee inventories as a
percentage of usage are estimated to fall to 21.5% by the end of this crop
year, the lowest in 12 years, according to Rabobank.
"The demand for arabica is going to pick up
significantly in the next two quarters," he said.
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Write to Carolyn Cui at carolyn.cui@wsj.com