Prospects of higher production in Brazil and Vietnam along with weakness in other commodity markets in a general speculative bailout weighed on coffee prices. The latest Commitments of Traders Report released by the CFTC showed that non-commercials went from net long to net short. Noncommercials were net short 2,876 lots as of May 30 compared with 281 net long in the previous report. By contrast, small speculators (non-reportables) increased their net long position from 3,160 to 3,299 lots. Commercials reduced their net short position from 3,441 to 423 lots.

The ICO composite indicator price dropped from 88.46 to 87.38 cents/Ib, while Colombian mild arabicas gave up 2.87 cents to settle at 107.14 cents. Other mild arabicas declined from 107.54 to 104.42 cents. Brazilian natural arabicas closed 1.62 cents lower at 95.42 cents. Robustas, on the other hand increased slightly from 59.42 to 60.93 cents.

Speaking of robustas new crop supplies in Vietnam have dwindled and sellers are holding out for higher prices for the remaining beans. Exports so far were relatively strong despite lower production in 2005/06. The total in May amounted to 90,000 tonnes, unchanged from the previous month but up from 63,000 tonnes exported the same month in 2005. Total exports in October/May 2005/06 reached 647,000 tonnes, up from 599,000 tonnes exported the same period in 2004/05. Based on a production estimate of 12 min bags for 2005/06, down from 13.9 min the previous season, traders estimate that the country still has about 2.5 min bags left for export. German trader Neumann Kaffee Gruppe (NKG) sees Vietnamese coffee production rising to 15 min bags in 2006/07 from 10.8 min the previous year.

Brazil's large 2006/07 coffee crop is expected to pressure prices in the coming months unless there is some winter frost damage with 2006/07 production officially forecast at 40.62 min 60-kg bags, up 23% from last year. However, trade sources are more optimistic expecting a somewhat higher figure. The 2006/07 coffee crop officially started on May 24, though coffee farmers started harvesting early in the month. Local analyst Safras & Mercado revised down their 2006/07 harvest forecast to 43.5 min 60-kg bags from a range of 46.449.1 min seen in December as hot, dry weather in January and February following heavy rains toward the end of last year encouraged the growth of funguses and crop diseases, reducing yields. Arabica output is now seen reaching 33.25 min 60-kg bags, compared with 35.4-37.4 min forecast in December and 25.3 min produced in 2005/06. Robusta production in 2006/ 07 was put at 10.25 min bags, down from the previous 11.0-11.7 min bag forecast but still up from 9.25 min harvested in 2005/06. German trader NKG is even more pessimistic saying that Brazil's 2006/07 coffee crop will rise to only 41.5 min 60-kg bags from 34 min last year. Arabica production is expected to rise to 30 min bags from 21.7 min last season, while robusta production was forecast to fall to 11.5 min bags from 12.3 min in 2005/06. NKG said the increase is due to an upturn in the biennial production cycle and better crop treatment with the latter also being cited as the reason why the 2007/08 crop downturn could be less than usual.

With lower global coffee production exports have slowed. Members of the International Coffee Organisation (ICO) exported 6.791 min 60-kg bags of coffee in April 2006, down by 13.1% from 7.816 min exported the same month last year. That brought total exports in the first seven months of 2005/06 (October/ September) to 47.168 min bags, 11.2% less than the 53.136 min exported the same period in 2004/05.

Lower exports have led to a fall in consumer stocks since the beginning of 2005/06. According to stock data released by the European Coffee Federation (ECF), European coffee stocks have fallen by some 3 min bags since the beginning of 2005/06. The largest fall has been in Antwerp as robusta stocks have fallen in response to lower Vietnamese exports. This drawdown has primarily been of noncertified stocks, trade sources said. In the United States, GCA coffee stocks fell from 5.663 min 60-kg bags at the beginning of October 2005 to 5.275 min at the end of March. In Japan, Japan Coffee Association recorded stocks also fell by 0.5 min bags during the first half of the coffee year. Despite the fall, consumer stocks remain relatively high. However, as producer stocks are at extremely low levels any crop shortfalls would be needed to be met from consumer stocks. However, roasters are not yet concerned given prospects of higher production in Brazil and Vietnam in 2006/07.

Commenting on world supply and demand, NKG said there has been a supply deficit in world markets since 2003, mostly because of bad weather and plant diseases destroying crops in Vietnam and Central America. It was added that demand beat supply by about 2 min bags, rising to a 5 min bag deficit in 2005 and an 11 min deficit in 2006. However, higher production in producer nations other than Brazil is expected to bring supply slightly above demand in 2007, possibly by about 1.5 min bags.

The United States Department of Agriculture (USDA) will be releasing the next report focusing on coffee on June 9. Based on the attached reports released so far, it can be expected that USDA will lower its production estimates for both 2004/05 and 2005/06. The reports also gave preliminary views on 2006/ 07 production. J. Ganes Consulting LLC said that if , production were to be unchanged in the countries that did not release attached figures, world production next season could rise to 123.947 min bags. This would fall short of the record harvested in 2002/03 when production totalled more than 126.6 min bags. During that season, the bumper crop resulted in a massive build up of global stocks. However, since then world consumption has grown both at origin and in importing countries and so, having a crop of 124 min bags should not have the same depressing impact on prices, Ganes said. In fact, it might not be sufficient to meet demand, it added.

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