COMMODITIES – Rally in Coffee Is Brewing

COMMODITIES CORNER

By MAJA WALLENGREN | MORE ARTICLES BY AUTHOR

Diminished coffee supply brings head of steam for investors in the bean.
 

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AS GLOBAL COFFEE SUPPLIES DEPLETE at an increasingly fast pace, traders are positioning themselves for an extended period of higher futures prices for arabica, by far the world’s most popular type of coffee. Arabica accounts for 65% to 70% of global coffee consumption; the rest comes primarily from the robusta species.

The primary arabica crops, which come from Colombia, Central America and Mexico, have shown no real signs of recovery from two consecutive years of El Niño-related weather problems. The 2009-10 harvest is coming in slower and lower than initially expected, brewing bullish sentiment.

ICE Futures U.S. coffee prices have held to roughly a $1.30-to-$1.45 range since mid-October, although they are now inching nearer the top of that band. Friday, March contract coffee settled at $1.4135 a pound, up 2.39% on the week.

 .”The market is starting to realize that there is a lack of supply. We are in a very precarious supply-demand situation; anything that goes further wrong will send the market skyrocketing. Now does that mean $1.75 a pound? If you break $1.75, then the market is definitely going to look for levels above” $2, says Marco Ruttimann, a partner in the Miami-based brokerage Coffee-Link International.

Ruttimann says that while a price surge isn’t likely “right now,” coffee could rally if more problems arise, especially because greater demand for fresh supply is expected in the first quarter of 2010. World consumption remains strong, and is growing at 1.5% to 2% annually, despite the weak global economy, according to the International Coffee Organization.

What’s more, the certified stocks held at ICE warehouses are dwindling, and bumper crops from Brazil and Peru, which helped the market get through a shortage from Colombia and Central America in the spring, are no longer available because both countries are shipping a smaller harvest.

“Coffee is very undervalued as a commodity at the moment, and we are headed for an extended period of much higher prices with the general scarcity in the market,” predicts Ted Lingle, the executive director of the Quality Coffee Institute, a nonprofit organization that works to improve the quality of its namesake product.

ICE-certified stocks now stand at about 3.1 million 60-kilogram (132-pound) bags, less than a half-month of demand from importing countries. That’s about 30% below the more than 4.4 million bags in ICE warehouses at the beginning of the year.

The short-term market dynamics could push futures higher without boosting the premiums paid for physical coffee in the cash market, Lingle says, because supplies aren’t tight enough yet. “People have learned to live with fewer stocks and shorter inventories,” he adds.

But the situation will become much more severe, he asserts, when buyers inevitably stock up for the winter.

JANUARY CONTRACT CRUDE FELL to a nearly two-month low of $74.85 a barrel, then closed Friday at $75.47, down 2.3% on the week, on hefty supplies and dollar-strengthening. Gold hit an intraday record $1,226.40 at midweek, but closed at $1,168.80, off 0.5% from the previous Friday.

MAJA WALLENGREN is a reporter for Dow Jones Newswires in Mexico City.