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Prospects for arabica coffee prices in 2013

24 February 2013

In 2012, arabica coffee lost ‘more than one third of its value’. According to Rabobank, this resulted in arabica coffee prices being ‘down over 52% from the 2011 high’. This has been attributed to ‘a strong Brazilian crop’, boosting supplies and exerting a downward pressure on prices. According to Barclays, the Brazilian ‘off year’ (scheduled for 2013) production is projected to be only 5.9% down on 2012 (rather than the more normal 15.2%), and supplies from non-Brazilian producers are expected to be strong, so coffee prices are projected to recover only slightly in 2013.

Rabobank’s analysis of future coffee price trends broadly follows Barclays’ projections, while Commerzbank and Société Générale both project stronger average price rises (20 and 15% respectively above the Barclays projections over 2013). The stronger Commerzbank price projections reflect their analysis of the high level of net short positions adopted by speculative financial investors, which are considered to ‘have reached their highest level since May 2007’, and a more pessimistic perspective on Brazilian production during the ‘off season’.

A more pessimistic perspective on Brazilian coffee production in 2013 is confirmed by remarks from one of Brazil’s largest coffee producer groups, which dismissed ideas of a rise in Brazilian coffee production in 2013 as ‘absurd’ This needs to be seen against the background of concerns among Brazilian government officials over speculation, which is seen as projecting unrealistically high levels of Brazilian production in 2013. This is thought to be depressing prices and allowing speculative financial investments in the market.

Société Générale for its part takes the view that ‘coffee prices appear to be extremely undervalued from a fundamental perspective’. Currently, it is argued that macro-economic concerns, which are seen as depressing demand, are weighing down prices, but that current prices do not reflect ‘how historically low inventories are’, with this providing scope for price increases.

Arabica coffee: Analysts’ price projections for 2013 (US cents/lb, quarterly average price, New York front future contract)

  Barclays Commerzbank Rabobank Société Générale
Q1 165 170 160 188.14
Q2 170 200 170 196.69
Q3 173 220 175 199.47
Q4 176 220 170 202.68
Average for 2013 171 205 (168.75) 196.75

Source: Agrimoney.com (see below)

Editorial comment

The apparent lack of agreement on projected production forecasts for Brazil’s coffee harvest, and the varying price projections, are an indication of the need to put in place systems that not only provide more accurate marketing information but also better projections of future production. In some ACP regions this is seen as necessary to reduce speculative practices that may harm the industry in the long run. Such speculative practices can have a widespread impact on the entire global coffee trade, especially on smaller producers such as those in East Africa who have limited influence on international coffee prices. Information from the Coffee Board of Kenya shows that there have been some recent declines in all grades of coffee, but on average not big enough to be of major concern.

Given that Kenya produces good quality coffee that is used for blending with other coffees for high-end markets, it is not expected that predicted lower international coffee prices would impact heavily on Kenya’s arabica coffee prices. However, lower prices could negatively affect future developments in the Kenyan coffee sector.

Due to rapid urbanisation, availability of high-quality land previously used for coffee production has been declining, and efforts are being made to encourage coffee production in other non- traditional areas where agronomic conditions favour production of robusta coffee. High and stable international prices are required for the sustainable expansion of coffee production into these areas. The current danger is that lower arabica prices could drag down robusta coffee prices.

However, for other countries in the East Africa region that produce more robusta coffee, price developments are a matter of more immediate concern. This is particularly the case for Burundi, where export earnings from coffee are particularly important, and where diversification options are limited.

There would appear to be a need for new thinking on how to deal with fluctuating international commodity prices, so as to better cushion vulnerable countries and vulnerable producers from the vagaries of the market.

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