36 INTERNATIONAL
Although prices have increased sharply over the last two years, raising incomes for coffee growers to record levels, market participants do not predict a bonanza in production, as Marvin G Perez explains
R
ather than a boom in production, industry sources expect supply to remain relatively tight over the next
two years, with a possible ‘bounce’ in 3-4 years, when the fruits of the price rally could start paying off for growers, many of whom are still heavily in debt because of the effects of the ‘coffee crisis’ in the last decade. Strong currencies and higher labour
costs are also expected to deter coffee farmers from investing heavily in new plant- ings, fearing that another fall in prices could leave them saddled with even more debt. Soaring crude oil prices have also compli- cated the cost structure for producers, and could also hinder investment in the sector. Arabica and Robusta coffee prices have
rallied the last two years to levels not seen since 1997, a year when the effects of a Brazilian drought sent prices to US$3.18 a pound. Since June 2010, nearby Arabica futures have risen from 164 cents a pound to a 14-year high of 299.15 cents in early March of this year, an increase of 82 per cent. Prices have eased since, but could climb back up if any weather-related prob- lems emerge in key producing countries, where stocks are at historically low levels .
Robusta rallies by
more than 50 per cent In London, Robusta coffee prices jumped from US$1,702/tonne in late June 2010 to a three-year high of $2,672/tonne by mid- March this year, a spike of 57 per cent, a sit- uation which has created major challenges for industry players, many of whom don’t have a clear idea as to what could happen over the coming months when Brazil starts harvesting a smaller, biennial crop, which is forecast at 42-44 million bags.
High prices unlikely to yield big jump in output
Analysts agree that prices for green coffee are high – and are likely to remain high as long as production in countries such as Colombia remains low
José Sette, Acting Executive Director at the ICO, says he expects supply to remain tight for the next couple of years
In addition to poor crops in
Colombia for the last three years and sluggish output in Indonesia and some Central American countries, a softer Dollar has also contributed to the rise in the price of commodities. At the same time record low interest rates has made it easy for speculators to borrow cash and enter commodity markets, exacerbating the upward trend in prices. On the demand side, steady consump-
tion growth in producing countries has left exporters with the lowest stock levels in decades. Rising consumption in non- traditional countries such as China, India and Indonesia has also contributed to tightness in the supply/demand equation, although numerous well-known players have blamed speculators for the rise.
"Supply should stay tight for the next year or two," said
José Sette, Acting Executive Director of the International Coffee Organization
Some argue that while there is
undoubtedly a tight supply situation for high quality coffees, the world is not see- ing a shortage of coffees in the broader sense. That was one of the messages conveyed by Howard Schultz, President and Chief Executive Officer at Starbucks Coffee Company, when he spoke at the National Coffee Association’s annual convention in mid-March.
Strong currencies
Years of low prices, rising labour costs and an exodus from coffee producing areas into urban centres has undoubtedly left many producing countries short of labour. Colombia is one of the countries affected
by this labour exodus, but other countries such as Mexico, Costa Rica and Brazil - all key producers of Arabica - have seen simi- lar trends. An increase in the minimum wage in countries such as Brazil, where there is also demand for land for other commodities, and where the cost of land is
May 2011 C&CI
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