Coffee economics

The global coffee supply crisis?

By Maja Wallengren  For four years running, the world’s coffee supply-demand has been running at a deficit. Global stocks and inventories have continued to dwindle with no recovery in sight. Certified stocks under the ICE futures exchange in New York and European warehouses as of 27  January this year were at 1.532 million 60-kilogram bags. Take into account total green coffee stocks in the United States, which include shipments from the 2011-12 Brazil crop, and the figure comes to 4.295 million bags – equal to half a month’s demand in importing countries. “This figure has continued to come down year after year, and even with the new crop from Brazil, and the main crop from Colombia and Vietnam, we still have not seen stocks recover,” says Pedro Echavarria, a veteran independent analyst in Colombia. A comparison to the year-on-year figures shows the continued decline. By the end of December 2011, certified stocks were at 1.530 million bags, down from 1.706 million bags a year prior. On 27 January this year – when stocks should have picked up as this is peak export season – the 1.532 million bags represented a drop of 113,000 from the 1.654 million bags recorded a year prior. “This is the time that stocks should be increasing, and not going in the other direction, so that is not exactly a great indicator of new supply. As a result of the continuing tightness we have seen premiums rise sharply,” says one green coffee trader who works with a major buyer in the New York Arabica market. When the flowering season for the 2011-12 harvest started across the prime Arabica producing region in Central America and East Africa, hopes were high that the new cycle would provide a bumper crop and a healthy recovery in output numbers. But climate change and erratic weather patterns across the world’s coffee belt have once again cut these initial hopes for a healthy recovery short of expectations. This means that the world supply of coffee as of January has 2012 entered its fifth deficit year. “Adverse weather conditions during crop year 2011-12, which could have negative impacts on production or post‐harvest activities, were recorded in many exporting countries, particularly in Central America, Colombia and Indonesia,” says Roberio Silva, Executive Director of the International Coffee Organisation (ICO), in his latest market report. “Speculation on estimated production for crop year 2011-12 continues to put pressure on coffee prices,” says Silva, adding that “the supply-demand balance continues to be tight”.

While an official estimate for consumption in 2011 has yet to be published, ICO sources and industry analysts tell GCR there has been no indication of world consumption slowing down and global demand should come in at close to 137 million bags. These growth rates are the direct reason for the draw down in stocks. While estimates for how much coffee the world held in total stocks have typically varied greatly, most market calculations put total world stocks at between 40 – 48 million bags at the end of 2007. The continued supply deficit, since those stock levels were recorded, would have seen a decline in stock of close to 32 million bags, as buyers have fed off the remaining stocks while consumption rose against a shortfall in production. This is a far different picture than in 1999-2000, when massive overproduction saw the cycle produce 130 million bags, at a time when world consumption was at about 110 million bags. This is what forced prices down to historic lows. The result was what became known as the “coffee crisis” as millions of small growers worldwide were thrown into unprecedented levels of poverty and social misery, with tens of thousands of children in coffee regions in East Africa and Central America suffering severe malnutrition. In Ethiopia alone, malnutrition linked to the coffee crisis was reported by NGOs to have caused the deaths of over 60,000 children under five years old. Since then, coffee consumption has exploded by around 25 per cent to current figures approaching 137 million bags. Production, however, has stagnated at about 130 million bags. The impact by the coffee crisis on farms and producers worldwide has left large parts of the producing world, which is managed by tiny small-holder producers, permanently damaged and unable to recover to production levels seen in 1999-2000. Erratic climate has added even more challenges to producers. ICO figures for world production today show that total global production stood at 120 million bags in 2007-08; 128.3 million bags in 2008-09; 123 million bags in 2009-10; 133.1 million in 2010-11; and 128.6 million bags in 2011-12. World demand meanwhile registered at 129.3 million bags in 2007; 132.9 million bags in 2008; 131.8 million bags in 2009; 135 million bags in 2010 and 2011 is expected to come in at close to 137 million bags (see chart for details). “Consumption continues to grow at very healthy levels, with the slowest growth seen in the traditional consumer markets in Europe and the United States still recording average growth of 1.5 per cent. But many emerging markets are continuing to attract growth rates two or three times higher,” says one senior industry analyst. Many in the industry expect this will add a minimum 2 million bags to world demand a year for the next five to 10 years.   Colombia’s Echavarria says that even though a number of other analysts openly marvel over the ICO’s report that the 2010-11 crop season saw 104.5 million bags of coffee exported – the highest figure on record – this “is really quite insignificant” as it did not materialise into any replenishing of world stocks. As the 2012 crop year gets underway, many eyes remain firmly  fixed on Brazil’s production. From the time when supply was at its tightest in 2011, and many in the market tried to talk up the prospect of a record crop of over 60 million bags in Brazil, consensus today is building that the new up-cycle harvest is unlikely to yield more than 52 to 54 million bags. “Everybody in coffee loves to talk about the 60-million-bag crop in Brazil, but we have never actually produced that much,” says Luiz Suplicy Hafers, an analyst and the current Director of the Coffee Department of the Brazilian Rural Society (SRB). “And when growers talk about ideal climate for coffee they really mean perfect and that just never happens in coffee.” Hafers, who comes from seven generations in Brazil’s coffee industry, says that as the crop is starting to enter the late cherry development and final bean formation, it’s becoming increasingly clear that the drought that hit many key areas in Brazil right after the flowering were “severely affected” and will draw the final production figure downward. In Vietnam, the world’s second largest grower, production is down 5 per cent at 18.5 million bags, from 19.467 million bags in 2010-11. Indonesia’s new harvest could reach 9 million bags, largely unchanged over the past crop year. India’s coffee producers are hopeful they may harvest a bumper crop of as much as 5.33 million bags.
In Central America, drought and two weeks of non-stop rains from five different tropical storms and hurricanes in October has already taken a severe toll on the region’s new crop. Damage estimates on losses are between 750,000 and 1 million bags for the region including Central America and Mexico.

As picking of the 2011-12 harvest wound down, the latest official forecasts from the region’s coffee institutions have been lowered to levels significantly below those used by the ICO. “Everyone was anticipating bigger crops which were never likely to come. The flowering did not come out that well in a lot of areas and even though prices have been good in the last year, a lot of people in the market are forgetting that most of the producers in Central America are still paying off debts so they don’t have any money left to invest in their farms,” says Commodity Analyst Jack Scoville, Vice President of The Price Group in Chicago, adding that he expects the region’s 2011-12 crop to come in below last year. Production from the region that comprises Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua is almost flat, with 12.613 million bags expected, compared to 12.378 million bags in 2010-11. This latest forecast has been gradually lowered from the original, which was expecting a 10 per cent growth. It is most likely still a welcome figure, after the failed Central American 2009-10 harvest of 10.524 million bags, which was the smallest crop in the region since the 1950s. But it remains some 20 per cent below levels seen 10 years ago when the five countries produced between 14 and 15 million bags in an average cycle. In East Africa, many coffee producers in Uganda are still struggling to recover from years of wilt disease. Elsewhere in the region, pressure on land for industrial development and over-population continue to create challenges of proportions not seen elsewhere. From a share of over 15 per cent of world output nearly a decade ago, total African production has fallen to just over 10 per cent, of which the bulk is produced in East Africa. As the East African harvest is ending, estimates point to a modest recovery of about 9.5 per cent with total output rising to 11.917 million bags from Burundi, Ethiopia, Kenya, Rwanda, Tanzania and Uganda. This compares to the 10.885 million bags in the last cycle. Despite the small recovery, exporters and analysts are still expressing disappointment. “I would have expected a slightly better crop from East Africa, just as the same hopes were pinned on Central America given extremely favourable pricing and improved crop care,” says Coffee Analyst Judith Ganes-Chase. She says that while such forecasts are disappointing, the main supply issue at stake for the coffee industry continues to be the ongoing structural problems that have made it difficult for Colombian producers to recover from years of trouble. “Colombia just doesn’t look too good and there is a certain amount of nervousness in the market about the supply situation in part because of the Colombian crop,” says The Price Group’s Scoville. The latest official figures from Colombia, the world’s largest producer of mild washed Arabica, confirmed private reports of a 2011 harvest even worse than expected, with total production in the calendar year 2011 ending at just 7.8 million bags, down 12 per cent from the 7.8 million bags produced in 2010, according to the National Federation of Coffee Growers (Fedecafe). Colombia’s harvest based on the 2011-12 coffee year, which runs from October through September, is expected not to surpass 7 – 7.5 million bags, one of the smallest crops on record in more than 50 years. Colombia used to produce between 11 and 13 million bags. These figures continue to add pressure on an already tight supply balance. “There is coffee today, but not enough to restore availability or rebuild stocks and inventories,” says the American green coffee trader. “It’s a mixed bag of news from Central America. But one thing that’s certain is that nobody wants to be short for the end of this crop because roasters have very little on the books from now until June.”
Tight conditions have generally made analysts and traders wary to provide any forecasts on future prices. Few traders seem confident that the supply deficit is enough to push prices back up over US$3 per pound or higher during the second quarter, but most seem to agree that fundamentals support prices starting at $2.40 per pound to $2.80 per pound. “Anything is possible here,” says Marco Ruttimann, a Partner in the Miami-based brokerage Coffee-Link International. “The imbalance in the supply-demand picture is so precarious that anything that might go wrong at this stage in producing countries, especially in Colombia and Brazil, could send this market flying to levels never dreamed of before.”   

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