Commodities Corner: Coffee Prices Are Set To Perk

 Commodities Corner: Coffee Prices Are Set To Perk

BARRON'S   -  Leslie Josephs  

  

  Arabica coffee futures are trading near 17-month lows, but prices are poised

to grind higher.

  Brazil, the source of around one-third of the world's coffee beans, had been

expected to reap one of its largest crops on record. That has pushed arabica

prices down 21% so far this year.

  However, trouble is brewing for those forecasts -- and prices should perk up

through the first half of this year.

  First off, dry weather has cast doubts about the Brazilian harvest. The

government estimates a crop of just over 50 million 60-kilogram (132 pounds)

bags for the 2012-13 crop, which begins in May. But some private estimates were

near 60 million bags. Brazil's coffee trees bear fruit in alternating cycles

that produce larger and smaller harvests, referred to as on- and off-cycles.

This is an on-cycle season.

  But due to the parched conditions, output may not soar. Joaquim Ferreira

Leite -- export director at cooperative Cooxupe, whose 12,000 members produce

around 10% of Brazil's crop -- said this year's harvest will most likely be in

line with the last one, when Brazil was in a smaller, off-cycle year that

produced only 43.5 million bags, according to the International Coffee

Organization.

  Also with prices near 17-month lows of $1.7445 a pound, one major U.S.-based

coffee trader said farmers in Brazil may hold their supplies off the market to

pressure prices upward before selling. This tactic recently was successful in

Vietnam, the world's No. 2 producer. Coffee buyers say farmers there held off

selling until prices rallied for their robusta coffee -- arabica's less

expensive, lower-quality cousin. Prices in London for robusta have gained 14%

this year.

  Also, arabica prices hit a 14-year high last May of $3.0625, and farmers

"already got a taste" of those prices and probably will take steps to chase

them this year, the trader said.

  If dryness may clip Brazil's output, the opposite has taken a toll in

Colombia and Central America. Torrential rains in those nations, which produce

about 12% of the world's coffee beans, have led to tight supplies for their

sought-after arabica beans, which should lend additional support to prices this

year.

  Arabica coffee prices will probably average $2.0587 per pound this year,

Societe Generale forecast in a report late last month. On Friday, arabica for

May delivery settled at $1.7920 a pound, down 2.1% on the week.

  "We expect prices to continue trending lower into the Brazilian harvest,

before reversing higher . . . as supplies begin tightening again, assuming

demand remains strong," said Michael Haigh, a Societe Generale analyst.

  Global demand for coffee is growing steadily -- at about 2% annually for

several years. A return to prices above $2 a pound, could open the floodgates

for another move toward the multiyear highs hit last year. More bullish news

should be in store for next season.

  If prices can firm even with an on-cycle Brazilian crop, it is safe to expect

a bigger rally ahead of the 2013-14 season, since Brazil will be in an

off-cycle. Expect prices to start rising again in the second half of the year

in anticipation.

  The market for coffee and the farmers who grow the beans have been subjected

to boom and bust cycles throughout history. But while prices recently have

fallen, the days of low-priced coffee appear to be over.