There was a time when coffee forecasting was easy. That was when the International Coffee Organisation (ICO) was one of the only global institutions releasing forecasts for world production and consumption. Sure, the US Department of Agriculture (USDA) was also in business, but as producing countries regularly met with importing nations to decide on export quotas and minimum prices, all parties would make sure the balance was right. That all came to an abrupt end in 1989, when coffee prices crashed because of massive overproduction and the US decided to leave the ICO’s International Coffee Agreement on export quotas and minimum prices. As the Cold War came to an end in the years that followed, so did the unwritten agreement between the ICO and the USDA to keep figures for supply and demand in check. With the demise of Cold War politics came a new market fully empowered by free trade. A consequent effect of that development is a coffee market that today is bombarded with countless forecasts from private traders, analysts, exporters, green coffee buyers, investment funds and roasters as well as the traditional official institutions. “If you go by the ICO forecast, year after year they are pretty consistently going to be in the lower range while the USDA is constantly in a higher range,” says Marco Ruttimann, a partner in the Miami-based brokerage Coffee-Link International. “When you have these forecasts none of these institutions or agencies want to give out numbers that could cause any significant impact or disruptions to the market.” When the 2012-13 international crop cycle officially started last October, both the ICO and USDA pegged the new world crop between 148 million and 151 million 60-kilogram bags. But these forecasts soon started moving in opposite directions, and with market volatility growing and prices increasingly fluctuating, it would appear that ICO and USDA have grown further apart than ever. The ICO primarily releases forecasts based on the official estimates issued by governments in producing countries. However, the organisation is frequently criticised for not conducting more individual analysis when presenting its forecasts in monthly market reports. The USDA, in contrast, is seen by many individual farmers and producer organisations as supporting the large multinationals that dominate coffee buying and trading. “The ICO always cites the figures from Conab for Brazil which is always too low, and the figures from Vicofa for Vietnam which are notoriously on the low side as well,” says Oscar Schaps, Managing Director and Head of Global Soft Commodities for financial services company INTL FCStone. Private stakeholders including INTL FCStone, Morgan Stanley and Italian roasters Illy Caffe, all believe the 2012-13 harvest cycle will end with a healthy oversupply. These same groups also believe that even with the continuing onslaught of coffee leaf rust in Central America, other origins like Brazil, Vietnam, Indonesia and Colombia will easily make up for the shortfall. According to Brazil’s main crop supply forecasting agency, Conab, total production in Brazil in the 2012-13 harvest reached 50.1 million bags. Conab puts output from the new 2013-14 crop, for which harvesting is now at its peak, at 48.6 million bags. The USDA, meanwhile, has pegged the new Brazil crop to reach 53.7 million bags, only marginally down from the output in the 2012-13 harvest of 55.9 million bags. If this margin is seen as too wide for comfort, private trade forecasts put the figure even higher, with current production seen up to 58 million bags. This would potentially make it not only the biggest ever crop in an off-cycle, but could be a new all-time record for Brazil after the 2012-13 crop, which Conab had ending at a record of 50.1 million bags. However private estimates of this result vary, from Brazilian consultants Marcado e Zafra’s figure of 54 million bags to 57 million bags from Santos-based exporters Comexim. But the industry remains divided between those who agree with comments such as those from Schaps, and those who disagree and believe the overall balance is a lot tighter. Those speaking in favour of the ICO say critics need to remember that, although government agencies in large producer nations like Brazil and Vietnam may have a tendency to underestimate crops, many other countries consistently overestimate their crops for a variety of political reasons. A large share of the surplus of crops from the balance of underestimated countries is put up against the deficit in crops from countries that are regularly overestimated such as Ethiopia, Ecuador, Mexico, Nicaragua and Colombia. By the end of all counts, the final balance may not be too far off, say those traders, analysts and roasters. Many veterans in the coffee trade also applaud the efforts the ICO has made in the past decade to improve its statistical base and make figures available on a more regular basis, update earlier statistics and present more credible market information overall. “The ICO is wonderful for the statistics, they have done a great job at improving their database and the ICO figures today really are very good,” says commodity analyst Jack Scoville, Vice President of Chicago-based financial services company, The Price Group. “All organisations that provide statistical data have a margin of error,” says Carl Leonard, Vice President for Green Coffee of US roasters Community Coffee. “Most of us who follow production and consumption patterns typically say that the area of accuracy is somewhere between the numbers that the USDA provides in their tropical coffee production reports and the numbers that the ICO provides.” The Executive Director of the ICO, Roberio Silva, tells Global Coffee Review that he plans to address the issues of conflicting data during his term at the head of the ICO. He says he will seek to find a way to improve the Brazilian figures released by Conab, since the weight of Brazil in overall statistics by far is the most influential. Silva says better and more balanced views from Brazil would go a long way to helping reduce some of the speculation in the market. “I want to find a way to sit down with all the main Brazilian groups and try to see if we can figure out why there is such a big difference in the numbers and how we can collaborate with all of them to get a better and more balanced forecast out for Brazil?” says Silva, referring not only to Conab but also to other players in the Brazilian market such as the Coffee Exporters Council, Cecafe.
The troubling news to some in the market is that even if the verification and analysis behind some of the key figures in coffee statistics are improved, there is no telling whether this will have any significant impact. The fact remains that the largest volume of forecasts come from the market itself. “The question you have to ask is whether forecasts by any of these companies really can be considered objective, because all these companies make a living by trading coffee at favourable levels to generate profits,” says a physicals trader with a big hedge fund in New York, speaking to Global Coffee Review on condition of anonymity. “Just because the data coming from these companies dominates the flow of forecasts and you have more than 10 times the figures for these companies than what you see from the ICO, doesn’t make it any more correct than the one or two forecasts that stand out by not following the trend.” Besides the two main agencies, market observers can find a long list of financial service providers that all actively participate with individual quarterly or biannual reports on coffee. These include Macquarie, Rabobank, Citigroup, Commerzbank, SocieteGenerale, Standard Chartered, Deutsche Bank, Morgan Stanley, Fortis, Neumann Kaffee Gruppe, Ecom, Noble, INTL FCStone (formerly Hencorp), Volcafe/EDF&Man, Italian coffee roasters Illy Caffe, and private investment funds. “When you look at the numbers coming out of the trade you have to consider that they manage the books according to opinion and try to manipulate numbers according to what will fit their books,” says Coffee-Link International’s Ruttimann. Looking at what is on top of the books based upon data available through mid-June, investment funds are currently holding net short positions worth at least 9.2 million bags, according to the Commodity Futures Trading Commission. This is not far from the record numbers for short positions worth over 11.1 million bags, both recorded in February and March 2013. Any attempt to try to cover these positions could easily lead to major disruptions. Perhaps the only forecasting agency that stands apart as providing independent analysis is German statistician F.O. Licht. This company’s figures for most crop years stand in the higher middle ground between the ICO and the USDA. The other set of forecasts that in the last year has become a topic of increasing industry talk is the quarterly supply and demand outlook reports released by Volcafe. While Volcafe generally uses a higher base for many of its production figures, it also has adjusted figures for demand upward for all the key consuming markets. So what does all this mean for the market? Looking ahead of the official start of harvesting for the 2013-14 crop in October, the big unknown is the extent of the impact of the coffee rust disaster in Central America. “Honduras’ production is down but not by as much than the rest of Central America,” Ruttiman says. “Production in Nicaragua and Guatemala is definitely going to be down, El Salvador and Costa Rica are losing production too and now the rust has also started in Mexico. Production for the region is definitely going to be down, but is it going to be down 10 to 15 per cent or 5 million bags? It’s definitely possible that you could lose 5 million bags from Central America, but it’s still too early to say.”
Unfortunately, it appears that, for all of the opinions out there, that definitive number remains elusive.
Coffee economics
What conflicting coffee data can you believe?
