Arabica #Coffee May Jump 24% on Tight Robusta Supply, CPM Says

Aug. 27 (Bloomberg) — Arabica-coffee futures in New York may rise 24 percent by year’s end because processors will need more to make up for alternative supplies of robusta beans, said Mark Hansen, the director of trading for CPM Group.

Arabica coffee may rise to $1.55 a pound on ICE Futures U.S. in New York from yesterday’s close of $1.245, while robusta futures traded on the Liffe exchange in London will jump to $1,600 a metric ton from $1,423, Hansen said yesterday.

Robusta coffee is used mostly in instant coffee, while milder arabica beans are preferred by coffee-shop chains including Starbucks Corp. Processors use both varieties in blends, varying the mix depending on cost and availability. The prices of the New York and London contracts often track each other, Hansen said.

“Robusta is just too cheap and is likely to lead them higher in the near term, while arabica is likely to have more constructive fundamentals longer term,” Hansen said by e-mail. “World demand for coffee just keeps going up while prices are too low to incentivize much more production.”

The London robusta contract is showing signs of a rebound from a seven-week low on Aug. 24, he said. Yesterday, it rose 4.9 percent, the biggest gain since March, contributing to a 2.6 percent rise in arabica prices that had touched a four-week low. The rally in London may be the trigger that spurs New York futures higher, Hansen said.

Robusta Rebound

Rising output of robusta beans, particularly in Vietnam, helped send prices in London down 8 percent this year while tight supplies from Central American and Colombia contributed to arabica’s 11 percent gain. Robusta may rebound on reduced sales from producers in Africa and Asia, Hansen said.

“Robusta has suffered because there is too much supply from favorable crops from Southeast Asia,” he said. “Now that supplies have been booked and prices are so low, concerns will shift to weather for the 2009-2010 crop and supply developments elsewhere.”

A drought in Uganda, Africa’s biggest robusta producer, may reduce exports to 3.1 million bags in the year through Sept. 30, down from a previous estimate of 3.3 million bags, according to the country’s Coffee Development Authority.

Output in Vietnam, the world’s largest robusta grower, may drop 6.7 percent to 18.35 million bags in the year starting in October, partly because rain destroyed blossoms, the U.S. Department of Agriculture has forecast. A bag of coffee weighs 60 kilograms, or 132 pounds.

Arabica prices may receive further support this year if the Brazilian government expands its price-support program, Hansen said. The program helps growers spread out sales to avoid a glut during the harvest in Brazil, the world’s biggest coffee grower.

To contact the reporter on this story: Shruti Date Singh in Chicago at ssingh28@bloomberg.net.