Global coffee prices did not show much volatility over the last two weeks or so as light moves to the downside and upside offset each other. As a result, the ICO composite indicator price closed at 132.72 cents/lb on August 1, practically unchanged from 132.18 cents/lb on July 16. Colombian Mild
Arabicas ended 77 points weaker at 150.13 cents/lb, while Other Mild Arabicas decreased from 146.98 cents/lb to 145.80. Brazilian Natural Arabicas finished 1.50 cents down at 133.04 cents, but Robustas settled 3.87 cents higher at 118.01 cents.
Brazil's coffee harvest caught up a little after its start was delayed by around six weeks due to a late start to the flowering season last October. The harvest was 60% complete as of July 22, up from 48% two weeks earlier but still significantly below the 76% that had been gathered by the same time last year. The coffee harvest is expected to run until October in some high altitude regions.
There was only limited activity in Brazil's cash coffee market as European and US importers of Brazilian beans were still well covered and in no hurry to start buying the 2008/09 crop. That was not the case for Brazilian buyers as the slow harvest pace made it hard for local roasters to find sizeable volumes of beans for domestic consumption. With demand for Brazilian beans from local roasters so strong there was apparently little need to cut prices to attract export sales. Brazilian growers continued to grumble that prices they receive barely cover higher fertiliser and other energy-related production costs as the appreciation of the Brazilian real against the dollar is reducing their earnings in local currency from dollar-denominated coffee sales. Several producers have largely fixed part of their crop for forward contracts, such as December and other months in 2009, which means that they will not be delivering new beans until toward the end of the year. The summer holiday season in Europe and North America, the main buyers of Brazilian arabica coffee, further dented business as the international roasters will not really be aggressive buyers until September anyway. In addition, farmers had little interest in selling while they awaited details of the renewal of the government's subsidy program (Pepro), which is only paid when they sell above a certain price. The scheme is expected to kick off in September and details will be finalised some time in August.
Physical trading was also slow in the Colombian cash arabica market as supply remained tight while the country is between harvests. The same was true for Mexico and Central America with only little left to sell from the 2007/ 08 crop. The next 2008/09 harvest is still a few months away from starting. Cash differentials remained stable to weaker for most of the region's coffees, and traders said the tendency was for differentials to continue to weaken, regardless of
the arabica futures market, as the 2007/08 coffee is now considered old crop. But with the harvesting of the next crop not starting until October, most market players said it was still too early to place orders. Traders agreed activity would not start to pick up until the second half of August. Coffee exports from the ninemember group of washed arabica producing countries in Central America, Colombia, Mexico, Peru and the Dominican Republic fell by 1.3% in June 2008 to 2.73 mln 60 kg bags from 2.76 mln the same month a year earlier. That brought total exports in the first nine months of 2007/08 (Oct/Sep) to 21.98 mln bags, still up by 5.1% from 20.92 mln shipped the same period in 2006/07.
Some countries in the region issued the first preliminary outlooks on the 2008/09 (October/September) crop, which did not show significant variations. El Salvadoran coffee production in 2008/09 is seen down by 3.8% on the year at 1.53 mln 60-kg bags, due to the biennial Arabica production cycle in which trees after a healthy crop are stressed and produce less. Honduras' 2008/09 coffee harvest is expected to remain unchanged from this season at between 3.73.8 mln bags. Guatemala issued an export forecast and said that shipments could reach 3.53 mln 60 kg bags in 2008/09, unchanged from the estimated level for this season.
In Africa, Kenya's weekly coffee auction resumed on July 29 after a one-week break and prices were boosted by the low volumes offered for sale. The weekly auction had resumed on July 15 after a two-month break but the following sale had been scrapped again due to the low volumes available. A return of cold weather in Central Kenya's main coffee growing areas in the second half of July delayed the drying of coffee beans. Volumes are expected to increase again in the first week of August.
In neighbouring Uganda, coffee wilt disease could cut 2008/09 output by 35%, the government's Kituuza Coffee Research Center said. The disease is expected to soon affect the majority of coffee farms countrywide. According to the Research Center, the expected outbreak is a result of the planting of wilt-prone trees in 2005.
Uganda's production has been recovering in the last years, following a bout of coffee wilt disease in 1996. The Uganda' Coffee Development Authority (UCDA) recently pegged the country's 2007/ 08 crop at 3.0 mln 60-kg bags, which compares with 2.7 mln in 2006/07.
The latest Commitments of Traders Report showed that noncommercial investors reduced their net long position in the "C" contract to 17,241 lots as of July 29 from 25,551 on July 15, while small speculators (non-reportables) reduced their net long position to 1,924 lots from 4,568. The commercial net short position fell accordingly to 19,165 lots as of July 29 from 30,119 a week earlier.
As far as robustas are concerned, Europe's physical coffee markets saw a switch of attention from Vietnamese to Indonesian beans as Indonesian differentials fell and Vietnamese sales offers were greatly reduced. Traders noted that Indonesia had staged something of a comeback in international markets as its crop this year is of much better volume and quality than last year, when Indonesian robustas were quoted substantially above Vietnamese beans.
Despite some reports of poor rains over the main coffee-growing region of Karnataka, India's 2008/09 coffee crop may still rise by 12% on the year to 293,000 tonnes as slightly less-than-expected rains during the current monsoon season are expected to cause less than usual damage to crops, the Indian Coffee Board said. It added that the new coffee crop was likely to be ready for harvest a month earlier than usual after flowering began in February. The harvest is thus expected to commence from November instead of December
In summary, the coffee market was largely able to insulate itself from significant falls in many other commodity markets in the period under review. Fresh supplies from Brazil are still relatively low with July shipments at a three-year low. Given that the pace of the harvest has now accelerated and with Vietnam heading towards a new all-time record crop at the end of the year, supplies should be plentiful throughout 2008/09. While this has the potential to cap any move to the upside, the medium-term outlook remains constructive as all this coffee will be needed to replenish stocks at origin, which have fallen to abysmally low levels. Furthermore, coffee prices need to stay strong in order to entice growers to produce enough coffee in coming years as key producers such as Brazil and Colombia are struggling under a cost-price-sqeeze resulting from higher input prices and weak returns in local currency because of the weak dollar.
