Before and after the Easter break the world coffee market was very quiet with prices fluctuating within narrow ranges. The ICO composite indicator price dropped from 93.21 to 92.41 cents/lb, while Colombian mild arabicas gave up 1.57 cents to close at 115.82 cents. Other mild arabicas closed 78 points lower at 113.40 cents while Brazilian natural arabicas closed 2.93 cents lower at 102.84. Robustas, on the other hand, increased slightly from 58.46 to 59.76 cents.

The market had been eagerly awaiting the Brazilian government's seconas, on the other hand, increased slightly from 58.46 to 59.76 cents.

The market had been eagerly awaiting the Brazilian government's second estimate of 2006/07 production. The National Commodities Supply Corporation (Conab) kept its second forecast within the 40.4-43.5 mln bag range reported in their first estimate in January at 40.6 mln bags. Arabica production was put at 31.02 mln bags, compared with 30.5 to 33.5 mln forecast in December, but up from 23.8 mln in 2005/06. Robusta output was seen at 9.6 mln bags, compared with around 10 mln forecast in December and 9.13 mln last year. The total crop is forecast to be 23.3% higher than the 32.94 mln bags produced in 2005/06 due to an upturn in the biennial crop cycle and increased care of coffee trees, Conab said.

A crop of less than 43 mln bags will not allow any rebuilding of stocks given estimated internal demand of between 16.5 to 17.0 mln bags. Furthermore, the government has already announced funding for the 2006/07 crop with BRL800 mln going toward storage and BRL600 mln for the harvest. About 3 mln bags could be carried into 2007/08 through the financing. That would leave Brazil with only around 23 mln bags for export compared with 28 mln shipped in 2004/05. Some even said that total financing will allow 6 to 7 mln bags to be carried over, leaving even less for exports. What is even more worrying is that, according to Conab, the area devoted to coffee is expected to fall by 3.5% while the number of trees is falling by 0.75% from 2005/06. All the same, the estimate was described as neutral as it was in line with expectations and had little impact on global prices. However, domestic prices have fallen by 25% since March 2005 in anticipation of a higher 2006/ 07 crop. The private National Coffee Council emphasised that the biggest price drop occurred in southern Minas Gerais, the heart of arabica coffee production, where prices have fallen by 26.3% since March.

Even though production is forecast to rise in 2006/07, it should not be overlooked that carryover stocks will be extremely low. Nevertheless, Brazilian traders are not unduly concerned saying that there is no catastrophe on the horizon as importing countries have sufficient coffee in storage. They suspect that international stocks will help maintain equilibrium in the supply chain, thus keeping international arabica prices in their current range of $1.04 to $1.10 per pound unless a frost damages part of Brazil's new coffee crop in the southern hemisphere's winter months of June through August. Meanwhile, the Council of Coffee Exporters of Brazil (Cecafe) reported a decline in March green coffee exports by 26% to 1.85 mln bags in March this year compared with 2.50 mln shipped the same month a year ago. Soluble coffee shipments also declined sharply from 315,361 to 239,628 bags after the EU's tariff free quota for Brazil expired on January 1st, 2006.

Not all is well with the crop in Uganda, one of the major robusta exporters. The state-run Uganda Coffee Development Authority (UCDA) said that 2006/07 production could fall by 50% from the 2.34 mln bags produced in 2005/06 due to drought in major coffee growing areas. This would seriously hurt coffee exports which reached 2.53 mln bags in 2004/ 05 compared with 2.60 mln the previous season. Exports in the first half of 2005/06 (October/ September) reached 1.035 mln bags, down from 1.230 mln exported the same period in 2004/05.

In its March 2006 coffee report the International Coffee Organisation (ICO) put world coffee production in 2005/06 at 106.56 mln 60-kg bags, slightly below its February estimate of 107.15 mln and less than estimated global demand for calendar year 2005 of 117 min. Total production included 68.58 mln bags of arabica beans and 37.98 mln of robustas. The production estimate for 2006/ 07 was reduced from 121 to 120 mln bags, reflecting the drop in projected Brazilian production. The ICO said that the current situation reflects a drawing down of world stocks. In this situation of relative balance, unforeseeable exogenous factors may, of course, have a significant impact on the market, the ICO said. The other feature relevant to the market fundamentals is the growing importance of consumption in nonmember countries, it was added.

Commodity prices in general have been rising steeply in recent months and some analysts warned that the bubble is about to burst which could send shock waves through financial markets. Even though coffee fundamentals point to stronger prices, the market could be affected by a general downward trend in commodity values. There are several factors that could cause the correction. -One is that higherthan-expected rises in interest rates in the US, Europe and Japan might reduce liquidity in financial markets, which would affect commodities and equities. Moreover, there are signs of slowing economic growth in the United States. Economic growth may also slow in China, leading to lower growth rates in import demand. Another factor is the possibility of an easing of demand from investors in commodities. Funds flows, from investors have driven up demand for commodities but that demand is prone to reversal, it was said. It was also emphasised that a large flow of the investment - funds that have come into commodity markets in the past three years is through funds that track commodity indices such as Goldman Sachs Commodity Index and the AIGDow Jones Commodity Index. The bulk of the $80 bin estimated to be in commodity tracker funds follow these two indices. After four years of strong performances, the index is showing a negative return of 2.5% for the year to date, it was added.

According to the Green Coffee Association (GCA), green coffee stocks rose by 81,769 60-kg bags during March to 5,274,975 bags at the end of the month, compared with 5,193,206 bags at the end of February and 4.949 mln at the end of January. Green coffee stocks stood at 5.696 mln bags at the end of March 2005 and 5.955 mln at the end of March 2004.


Courtesy: Vol.20, No.22 / 19th April 2006, EO.Licht's International Coffee Report

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