Muted reaction to coffee hiccup a sign for market

The relatively weak response of the coffee market to another poor year for Colombian coffee production looks a sign that the weak start of the year for bean prices looks set to continue.

The drop in Colombian coffee output to 7.8m bags – the lowest in more than 30 years, and well below growers’ initial forecast of 9.5m bags – might have been expected to lift prices.

However, the decline in output from the second-ranked producer of arabica beans, the type traded in New York, “has not had a pronounced effect”, Societe Generale said.

While prices of so-called Colombian mild beans, high quality coffee also grown in countries such as Kenya and Tanzania, “have shown some strength” relative to other arabica varieties, “this appears to only have had an effect on localised markets, but not the global market at large”, the bank said.

At broker J Ganes Consulting, veteran soft commodities analyst Judith Ganes Chase said that the failure of Colombia mild prices to react so strongly this season was “mostly be cause traders were not caught off guard by the small crop, having expected it from paying closer attention to the weather”.

The Colombian downturn reflected, besides plantation downtime stemming from a national replanting programme, heavy rains that encouraged disease and cut sunshine levels.

‘Downside risk to prices’

The dearth of reaction was indicative of a coffee market which “is comfortable with the current supply and demand balance”, SocGen analyst Michael Haigh said.

Indeed, prices of near-term lots have lost ground over further ahead ones, an increase in the so-called “bear spread”, and signalling limits on investors’ willingness to pay up for immediate supplies.

“This is a reflection of expectations of a strong Brazilian harvest as [Brazil] enterers an ‘on’ year,” Dr Haigh said.

Brazil, the top coffee grower, has alternate seasons of higher and lower production, 2012-13 expected to be a higher-output year.

“Looking ahead, with the global market poised to receive large Indonesian and Brazilian production in the coming months, and assuming conservative global demand growth, we see downside risk to prices as more likely than upside risk.”

Ms Ganes-Chase said that “even though physical market may be limited this season, having the assurance that there is a strong chance of more plentiful supplies next year could crimp rally attempts” in futures.

Seasonal update

The comments come ahead of a key seasonal period for the coffee market, as growers in Brazil gain a better idea of their crops, which faced setbacks from frost and dryness last year.

“Generally, by February farmers have a fairly strong indication on the upcoming Brazilian harvest,” Ms Ganes-Chase said.

Coffee for March closed 0.4% lower at 216.60 cents a pound, among its second-lowest finish since December 2010.