Market Views Diverge On Direction Of World Coffee Prices

Market Views Diverge On Direction Of World Coffee Prices
DOW JONES
 - Neena Rai LONDON - The recent erratic behavior of global coffee prices,namely the extreme divergences between arabica and robusta coffee blends, isleading observers of the market to differ on expectations of price developmentsfor further out this year. While arabica--the most widely consumed blend variety--has been one of theworst performing soft commodities this year, robusta has been one of thestrongest. Robusta is an easier to grow variety that is less expensive becauseits taste is considered to be more bitter than that of arabica. Arabica prices have declined 21% since the start of the year to recently hit18-month lows, as Brazil--the source of around one-third of the world's coffeebeans--was expecting to reap one of its largest crops on record. But the potential size of the country's harvest is now in doubt after arecent spell of dry weather, say market participants. Mark Horn, Brasilia-based independent agribusiness consultant, warned thatthe Brazilian government's forecast of a record 2012-13 coffee harvest mayprove overly optimistic due to the weather, especially as Minas Gerais statecoffee plantations experienced drought in 2011 and again this year. The world's top coffee grower, Brazil is on target to produce a record 50.6million 60 kilogram bags of coffee in the 2012-13 harvest which is due to startshortly, according to the International Coffee Organization. Roberio Oliveira Silva, the head of the London-based ICO, agreed that bullishfactors will come into play for the coffee market in the latter six months ofthe year. "Obviously, the second half of 2012 will be characterized by the onsets ofthe global coffee harvests and it's in fact at this point everyone will realizethat there is less coffee available than anticipated," said the ICO head. "I personally am optimistic for the coffee market during the second-half ofthis year. There is strong demand, but actually, we're not seeing much coffeeon the market. And I don't think the Brazil crop will bring loads of coffee.So, the future is definitely brighter," added Silva. But not all market participants share such optimism for the sector's outlook. Keith Flury, senior soft commodities analyst at Rabobank, expects that bettersupply during the upcoming 2012-13 crop year will temper any pricing rally andthat the second-half of 2012 could even see coffee prices revisit current lowlevels. Demand has shifted from washed arabica to robusta, which means there is lessneed for the washed crops to meet all increases in consumption this year, saidFlury. "And on the robusta side, prices are also expected to correct lower dueto the coming Brazilian and Indonesian harvests--the supplies of which areforecast to reach the market in coming months." Barclay's Capital--which issues quarterly forecasts for the coffeemarket--estimates that ICE arabica prices during the fourth-quarter 2012 couldfall to average $1.70 a pound and also predicts global coffee consumption thisseason will also fall by 1.3%. Emerging market economies are seen responsible for the slowdown, SudakshinaUnnikrishnan, agricultural analyst at Barclays' Capital, said. While demand for coffee does remain strong, Unnikrishnan said emerging marketeconomies are particularly sensitive to increases in prices as they are stillvery young consumers. "Should the price of arabica coffee rise in theseeconomies, we see consumers switching even to instant coffee."