Analysis: Global coffee market tight despite price slump

Wed Mar 21, 2012 12:32pm EDT
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By Maja Wallengren

GUAXUPE, Brazil (Reuters) - The latest retreat in arabica coffee prices signals the tightly supplied coffee market is not running out of beans yet, but the outlook for sub-optimal harvests and faster consumption indicate that by next season it could come close.

A tour of coffee areas in the world's top arabica grower, Brazil, showed a good but sub-optimal crop on the way. But in Colombia, output has dropped sharply and poor harvests have become almost a chronic problem.

On the demand side, things remain tight, with stocks in the United States and Europe totaling just about a month's worth of global demand.

Despite the tight market, prices of coffee futures on ICE have been hovering near a 17-month low hit on March 12.

"There is a bit of supply available but you have a deficit year coming so we have to be awfully careful here and not be too bearish," said Eric Nadelberg, Senior Vice President at Jefferies Bache, LCC in New York. "There is not a lot of coffee and as we move forward this will become more acute," he told Reuters.

Despite record exports last season, European stocks of arabica and robusta are at their lowest since 2005/06, as consumers down more cups. Stocks there stood at just over 10 million bags by end-December, with 4.2 million bags in the world's top coffee consumer, the United States, at the same time.

There have been two schools of thought over how coffee's fundamentals will influence the price of arabica beans -- more expensive than robusta. Arabicas are typically roasted and ground for brewed coffee while robusta is used in instant coffees or in blends with arabica.

Coffee market bears focus on expectations of a large Brazilian crop. Bulls point to the series of ever-smaller crops coming out of Colombia and other arabica producers in Central America and East Africa, a trend likely to continue.   Continued...