Conditions are brewing for strong coffee prices

WHILE the surge in sugar has dominated the headlines and the commodity markets over the past six months, prices of other soft commodities such as coffee have been steadily rising. Coffee has risen 23.2 per cent over the past year and there is now speculation that it could be the next bull story in the softs markets as supply troubles put upward pressure on price.

Like other commodities, prices have taken a tumble since mid-January, partly because of the recent rise of the US dollar against currencies of the major exporting countries such as the Brazilian real – Brazil is the world’s largest exporter of arabica coffee. But analysts expect that coffee will see a strong 2010 thanks to a continued supply deficit in both Brazil and Colombia, which is the main producer of washed milds (a grade of coffee). So far, production this year appears to be down to 123.6m bags from 128.2m in 2008-09.

In Brazil, where the harvesting season is complete, there has been an estimated 14 per cent fall in production and Colombia is unlikely to be able to make up the shortfall. Its harvest last year was very poor – down 30 per cent on 2007-08 – as a result of heavy rainfall, an outbreak of the coffee rust fungus, a plague of coffee cherry borers – a pest common across coffee-growing countries – and temporary reduced acreage as part of an ongoing re-planting of crops. The International Coffee Organisation (ICO) reckons that during this crop year, Colombia will not be able to recover its normal production, given the combination of climatic problems and the occurrence of coffee pests.

Barclays Capital analysts forecast a deficit of 1m bags in 2009-10, which in their view will support the ICE front-month arabica contract to average $1.41 per pound over the first half of 2010 (the May 2010 contract is currently trading at $1.366). They say: “Whether the arabica markets evolve to become a sustained bull story is primarily a function of weather conditions over the next 12 months. Key will be expectations regarding the 2010-11 Brazilian crop.” The Brazilian government supply agency Conab expects a near-record crop of between 45.9m and 48.7m bags which, combined with a moderate recovery in Colombian output, should help ease the market back into surplus and soften prices. BarCap analysts are expecting £1.35 per pound in the second half of this year.
Contracts for difference (CFDs) traders looking at going long on coffee at the moment should be aware that in the short-term, coffee prices will continue to be influenced by changes in the value of the dollar against exporting countries’ currencies.

You can trade both robusta and arabica coffee using CFDs – the underlying robusta market is listed in London while arabica is listed in New York. It is also much cheaper for UK CFD traders to trade robusta – at IG Markets the spread is just six points compared to 60 for the arabica market, and the margin requirement per contract is $1,390 as opposed to $2,801.

Coffee could be just the thing to put some buzz into your portfolio.