Oscar L. Schaps
Global Head of Soft Commodities, FCStone, LLC The coffee market during the recent past has been quite volatile, to say the least. Many factors affect the direction of price movements; some are quite clear, others not. At first glance the coffee world looks at fundamental factors such as straight out supply and demand to attempt to discover reasons for price movement. Unfortunately for many players several other fundamentals have been impacting the coffee market and it seems that those external influences are here to stay. Historically, the world mainly focused its efforts in knowing how much coffee would be produced, thereby driving prices. During the early 2000s the paradigm shifted to finding the true figure behind real consumption as the driver behind price movements. Consumption became the key when emerging markets developed the ability to drink more coffee, due in part by internal economics or better product offerings which made coffee more accessible or acceptable to more people. As we closed the first decade of the new millennium, and the world economies became more intertwined, capital markets began looking for innovative investment vehicles. Some of the new vehicles allowed more people easier access to commodities, making commodities a new and interesting asset class as an investment. As capital flows around the world seek balanced returns, the commodities markets became just one more place were investors could put their money to work. So what does this mean for coffee? In pure terms, it means that the macro world matters. Currently, and most probably in the future, coffee traders will have to watch and understand how the global macro factors influence our commodity. We will have to learn to incorporate the relative value between currencies. We will have to realise and accept that what happens in Europe affects all commodity values around the world. We will have to keep our eye on the US to see if policy will provoke capital flows to exit the commodity markets. Now, we can’t ignore the basic factors of our underlying product, so let us look at what our commonly used factors have to offer. Looking back in the mid-term, we have had four years of above average prices which have caused a natural consequence of business practices provoking producers to expand plantations. In response to good returns, producers all around the world have invested in their farms. As we see it, the days of very tight supply demand balance are behind us. Looking into the immediate future we see a surplus, and a considerable one at that. We see that for the 2012-13 coffee year we will have at least a 10 million bag surplus. This surplus will help rebuild stocks around the world. So what does this mean for prices? Prices have already started assimilating the change in supply/demand dynamics and currently we are trading at the same levels as we were at the start of 2010, you can see the market has adjusted. As we look to the future we need to keep in mind that the macro world changes and that business people respond to market realities and adjust portfolios accordingly. From my vantage point it feels like coffee prices will be moving sideways within a relative wide volatile range of prices between 120 and 160 US cents per pound as the markets react to external news from around the world. Keith Flury, Senior Commodity Analyst,
Agri Commodity Markets Research, Rabobank International Arabica prices are expected to find strength in 2013. The worst performing major agricultural commodity in 2012, Arabica may also find support in index rebalancing, and weakness in the US dollar. Fundamentally the Arabica market remains over-supplied and demand is lacklustre, however I view this as priced into the market. With the managed money gross short equivalent to more than 14 million bags of Arabica, and Brazilian farmers holding a sizable share of the previous harvest off the market, it is likely higher prices are needed to get the coffee out of farmer warehouses. For Robusta, the main supporting factor is the need to increase output to meet growing emerging market demand. As the developing world’s appetite grows for coffee much of that new growth is based in soluble coffee and Robusta. The last few seasons have seen this growth in demand, as well as a significant substitution of Robusta for Arabica, increase the tightness in Robusta fundamentals. Harvest pressure from Vietnam and the unwinding of a large net long speculator position have pressured the market in London, but we anticipate higher prices to spur production investment and ensure exports. Rodolfo E Mora, General Manager, Hacienda Tobosi Costa Rica Lately, New York Arabica prices have demonstrated less sensibility to supply and demand as a whole, tied more to economical and political events.
Brazil’s 55 million bags from its biennial year, and a consumption forecast increase on 3 million bags, might balance scales; but we can’t put aside the fear among investors who keep an eye on geopolitical events. These price levels were expected even two years ago. For 2012-13 some traders are talking now of a US$1.30 per pound level. If global economics and politics remain ‘stable’ there’s still a probability to experience a $1.80 – $2.20 negotiation level for exporters. Global politics and economics is where we have to focus our attention to negotiate and determine where the market is heading. This is not the case for Robusta, which is still strongly tied to supply and demand of countries like Vietnam, expected again to produce a bumper harvest. Farmers are better prepared to hold their coffee and negotiate, but can’t hold on long enough due to lack of space, or the fear of selling when roasters are already full, like we’ve seen. This has maintained Robusta prices under $2000 per tonne, but this behaviour is probably based on emotional factors. Once more information is gathered, we might expect some slight bullish behaviour with $2000 per tonne a negotiation level during 2013. Dang Le Nguyen Vu, Chairman, Trung Nguyen Coffee I see many factors that would affect to the global price of raw beans, especially Robusta. Firstly, we see a remarkable trend from tea-drinking countries moving to coffee, such as China and India. We also see increasing domestic consumption inside coffee growing countries such as Brazil, Indonesia and Vietnam. Meanwhile, crops are being affected by climate change and the need to replant coffee trees in main producers like Vietnam and Brazil. By 2020, Vietnam is aiming to replace 25 – 30 per cent of old coffee trees.
Last but not least, coffee farmers today have a better understanding about what they can demand from the market, and are better informed on market price. What could strongly affect to the global price of raw beans will be the responsibility of major coffee giants. For instance, the initiative of the Worldwide Sustainable Coffee Fund, raised by Walter Zwald in 2001, called for the justice in the coffee industry by asking the giants to pay more taxes to help support farmers from growing countries. Programs like these need to get off the ground, because lifting the price of raw beans and processed coffee will help everyone. While I think the price of raw beans will increase in 2013, the problem here is not about the price, it’s all about finding a win-win solution between the coffee consuming countries and growing countries.
Oscar L. Schaps