Coffee Prices Supported, For Now

While sugar has been the soft commodity star over the past 12 months, coffee prices have done little. Analysts at Barclays Capital suggest 2010 could prove a different story for coffee given the potential for supply side issues to impact on the market.

As Barclays points out, coffee is really a simple story in that the market revolves around Brazil and Columbia as the two largest producers, Brazil of arabica and Columbia of the washed milds varieties, which are the deliverable type of arabica for contracts on the ICE Futures Exchange.

On its numbers Barclays expects the coffee market will report a one million bag deficit in 2009/10, an outcome it suggests will support average prices for the ICE front month arabica contract of US$1.41 per pound over the first half of 2010.

Supply side issues are also supportive as the analysts point out the 2008/09 harvest in Columbia was very poor at 8.6 million bags, which was down 30% year-on-year thanks to heavy rainfall, an outbreak of coffee rust, low input usage, cherry borer and reduced acreage. 2009/10 is showing no signs of delivering an improved harvest.

As well, Barclays notes some other producing nations in Central America and Mexico are underperforming with respect to likely harvests, all of which has pushed arabica inventories down to their lowest level since February 2003.

This underperformance elsewhere has brought the market's focus to Brazil, which has just completed its 2009/10 harvest and delivered a fall of 14% in year-on-year terms from 2008/09 levels. Again, this was the result of adverse weather conditions, which impacted on the quality of the crop.

Weather will hold the key to the outlook for the coffee market over the next 12 months according to Barclays, as at present Brazil is expected to record a close to record crop of between 45.9 million to 48.7 million bags in 2010/11.

With Colombia also expected to record a moderate crop improvement to around 11 million bags in 2010, Barclays expects the market will return to a surplus, so softening prices in the second half of this year. Barclays is forecasting an average price for the second half of 2010 of US$1.35 per pound.

For the rest of the first half of this year Barclays remains mildly bullish on coffee however, suggesting prices will remain supported at least until there is is a reversal in the trend of falling stock levels on the ICE Exchange.