An escalating cost of production, labor shortages and climate change could hinder long term production growth. As it is already, gains in world coffee output have failed to keep pace with rising global consumption the past two decades, resulting in world coffee stocks reduced to cover the ongoing gap in supply.
Ill able to afford financing of stocks through this period, there has also been a shift in inventory from producer to consumer hands. Little coffee remains at origin. Up until now, the transfer of stock ownership has made the supply situation more transparent; roasters were more confident in their coverage than when the majority of the world’s coffee stocks had been sitting in producer hands. This is being put to the challenge now with a shortfall of mild Arabica coffee due to a combination of erratic weather and reduced fertilizer use. Harsh weather in Colombia and an increased incidence of broca have greatly reduced supply, and the realization that very little coffee remains at origin to cover this shortfall finally came into the market’s focus.
The sharply reduced Colombian crop—coupled with smaller output across Central American, Mexico and Peru—has had a ripple effect on cash market differentials for all mild coffees with price surging to all time highs.
Roasters seeking fresh coffee are now finding it difficult to secure the quantities they desire, even if willing to pay stiff premiums. The reduction in producer inventories has reached dangerously low levels that are creating gaps in the supply chain and forcing prices differentially much much higher.
Thus far, roasters have been able to draw from strategic reserves in consumer warehouses to cover some of their demand, and this has kept the futures market from surging as it did in 1997 when very little coffee was in importers’ hands and the majority of the world’s inventory was in producer countries.
Are the worst fears soon over and the onset of the Brazilian 2010-2011 crop going to avert a massive shortfall? The Brazilian harvest is expected to start sooner than usual due to the early onset of rains and flowering of the crop last year, so the current tight supplies won’t need to be stretched as far. However, the size and quality of the Brazilian crop remains questionable due to the erratic flowering that occurred. Brazil is expected to finish the 2009-2010 season with inventories at minimal levels of barely more than two million bags, and new crop coffee will be needed to replenish these stocks. Can prospects for a recovery in production in Colombia and elsewhere shut the window of opportunity for a price surge? Fresh supply from mild producers won’t be available until the onset of the new crop harvest towards the end of the year. These factors could prevent the market from slipping lower and potentially leave the market still at risk for a supply shock.
While the size and quality of the Brazilian 2010-2011 crop remains uncertain, there is also some question as to whether the following year’s off cycle crop will be affected by difficulty picking the 2010-2011 crop. Flowering for the upcoming Brazilian crop was extended well into January and the cherries should not be maturing evenly making it a difficult crop to harvest.
Furthermore, the limited global surplus in 2008-2009 followed by a sizeable production deficit in 2009-2010 has left the market still vulnerable to longer term supply issues, even with an expected rebound in output in a number of countries next season. Simply because production may be at record levels or close to it, doesn’t necessarily imply a bearish situation. A Brazilian crop of 50 million bags will be just sufficient to cover both internal demand of around 19 million bags and international needs of 30 million, leaving Brazil with very little coffee to replenish inventories. Even 55 million bag harvest would still be insufficient to guard against an expected sharp drop in Brazilian output in 2011-12.
World coffee prices still need to rise sufficiently to encourage renewed expansion in order for production to keep pace with coffee use in the years ahead.
Judith Ganes-Chase is the founder and president of J. Ganes Consulting, LLC—a leading, independent commodities research and consulting services company. Ganes-Chase is a world-renowned soft commodities and futures analyst with over 25 years experience in the food and agricultural industries.