Storm in a coffee cup

Coffee prices have escalated by a whopping 50 per cent since the beginning of the year, following dry conditions in Brazil, the world’s largest producer and exporter.

The world market, which was characterised by surplus the last two years, now suddenly looks vulnerable to a possible deficit. Whether an actual deficit will emerge, and if yes, what would be its size are questions to which answers are as yet unclear.

Prices are buffeted by uncertainty over the size of production loss in Brazil. The origin’s dry conditions earlier this year — January and February — have stressed coffee trees and impaired cherry development.

Currently, there is much speculation about the size of the crop; estimation is a real challenge. A reasonably reliable estimate may be available by June at the time of harvest.

Even before dry weather hit Brazil, the industry had known that tired trees would not be able to produce high yields this season (2014-15).

Although with dryness the situation has become critical, to be sure, there is no shortage of coffee worldwide at the moment as the past few seasons of surplus have allowed stocks to build.

The major coffee producers around the world are Brazil, Vietnam, Mexico and Central America, Columbia and Indonesia who together account for 80 per cent of global output.

India is also a producer of coffee — about 5 million bags equivalent to about 300,000 tonnes comprising one-third Arabica and two-third Robusta.

The world production forecast for 2014-15, of 149.7 million bags of 60 kg each, is by no means final. Crops are still developing, especially in the southern hemisphere. Brazil usually produces about 40 million bags of Robusta and 15 million bags of Arabica.

For 2014/15, coffee output in this origin was initially forecast at 56-58 million bags but now may well be down by 10 per cent.

At the moment, most observers are coming around to the view that production in Brazil could be 53 million bags; but what if actual harvest fell below 50 million bags, a possibility that cannot be ruled out.

In the event, the market could get into a deficit situation with consequences for the marketplace.

According to industry experts, despite a small anticipated rebound in Columbia, Arabica may well get into a deficit of 1.4 million bags in 2014/15 from a surplus of 1.5 million bags in 2013-14.

There is also the strong possibility of roasters switching back to Robusta because of widening price differential between the two varieties.

In this emerging scenario, speculative capital has quickly moved in. On the futures exchange (ICE), coffee is traded around $2 per pound, sharply up from levels ($1.35) a year ago. Huge net long positions have been built on the bourse.

If the situation does not improve, there is risk of producer default and panic buying by roasters.

It appears that funds are pricing in the worst-case scenario.

So, the key number to watch is Brazil’s production.

Anything above 53 million bags will result in a price correction and anything below 50 million bags would mean a deficit.

The world coffee market is firmly in the grip of weather and production uncertainties; and it is tough to call the direction price can take.

India is not a big player in the world coffee market; yet coffee is an important plantation crop from a livelihood perspective and its place in the agricultural export basket.

The country is likely to face weather-related production risk. The 2014 south-west monsoon has been forecast to be below normal. Temporal and spatial distribution of rains during June-September months would be critical.