Coffee industry warned of volatile prices

Coffee roasters and buyers will need to keep a close eye on prices over the next few months as a sharp fall in inventories on the back of a four-year supply shortage will make the market more volatile, according to a leading lender to agricultural businesses.

With Brazilian production of the higher quality arabica bean forecast to fall 13 per cent in the 2017-18 crop year, the key indicator of inventory available for consumption is expected to decline to an eight-year low, according to Rabobank.

The “stocks-to-use ratio” for 2017-18 is forecast at 30 per cent, the lowest level since 2009-2010, according to the Dutch lender. The lower inventories will mean that “any weather issue that we have will have an exacerbated price impact,” warned Carlos Mera, Rabobank’s coffee analyst.

Brazil is the world’s largest producer of coffee beans, with some of the most efficient plantations. However, growers have been plagued with droughts in recent years, with arabica output hit in 2014 and the key growing areas for robusta experiencing severe dryness over the past several years.

The South American country’s arabica output fall follows a bumper crop of 42m 60kg bags the previous year. Brazil’s coffee trees alternate between “on” years producing a bumper crop and “off” years, where the tree recovers from the stress of the previous year’s large production.

The output fall is forecast to have been exacerbated by aggressive pruning of the trees by growers, and the bank expects the arabica crop to drop to 36.7m bags.

Demand over the past few years has been high, leading to a build-up of stocks in non-coffee producing countries. However, with production declining, buyers will be turning to their inventories. “We believe much of this coffee is going to be needed in the coming 15 months,” said Mr Mera.

Some analysts questioned whether the sharp fall in arabica supplies, which takes the global supply shortage into its fourth year, was fully priced into the coffee market.

The arabica market is trading at $1.422 a pound, which is 10 per cent higher than at the start of 2016 but down sharply from late last year when the market almost rose to $1.80 led by the shortage in the robusta market.

“The price is a fair reflection of the current and past conditions,” said James Hearn, co-head of agriculture at commodities broker Marex Spectron. However, he said the arabica market was underpricing this year’s shortage estimates. “It’s a material deficit; everyone can see there’s a problem coming,” he added.

One issue that could affect the market is the lack of Brazilian government stocks after it successfully auctioned off its inventories this month.

Lower grade arabica coffee has been used as a substitute for robusta beans in Brazil, where key robusta growing regions were hit by scorching heat and lack of rain.

“The fact that the government managed to sell off its stocks without anyone complaining shows how tight the market is,” said Mr Hearn.

Brazilian government buying has supported farmers during times of bumper harvests and low prices, but for the first time in 10 years it has reduced its stocks to zero, and the market is without the buffer, said analysts.