The premium paid for arabica beans favored by Starbucks Corp. (SBUX:US) over the robusta used by Nestle SA (NESN) may rally from a 20-month low because of a surge in supply from Vietnam, the biggest grower of the less costly coffee.
Arabica fell 18 percent in New York this year on prospects for a record Brazilian crop as robusta rose 13 percent in London because of fewer cargoes from Vietnam. The premium dropped to 83.89 cents a pound on March 29, the lowest since July 2010. It will widen to $1.162 by the end of the year, the average of 18 analyst estimates compiled by Bloomberg shows.
Farmers in Vietnam have been stockpiling robusta as a hedge against consumer prices that surged 23 percent in August, according to Macquarie Group Ltd. With inflation moderating to 14 percent in March and harvests about to start in Indonesia and Brazil, they may now accelerate sales, the bank predicts. Arabica is poised to rally 10 percent in the next three months, as drought in Brazil threatens the crop and demand from emerging markets strengthens, Goldman Sachs Group Inc. estimates.
“People have focused on the shortage of robusta supplies, and that will change as the crops in Indonesia and Brazil come in and put pressure on the Vietnamese farmers to release their record crop,” said Keith Flury, an analyst at Rabobank in London. “The market is also seriously underestimating how tight the arabica supply-and-demand balance will be.”
Arabica traded on ICE Futures U.S. fell 20 percent in the first three months of the year, the biggest quarterly decline in more than a decade, and reached a 17-month low of $1.7445 a pound on March 22. Futures that closed at $1.862 yesterday will reach $2 in three months, Goldman’s commodity research team, led by Jeffrey Currie in London, wrote in a report March 28.
Robusta jumped 12 percent in the first quarter, the biggest gain in a year, and traded at $2,031 a metric ton (92.12 cents a pound) yesterday on NYSE Liffe. Prices will average $1,600 in the fourth quarter, 21 percent less than now, Rabobank’s Flury wrote in a report on March 27.
Arabica is the second-worst performer this year in the Standard & Poor’s Spot GSCI Index of 24 commodities, behind natural gas. The gauge advanced 8.2 percent as the MSCI All- Country World Index of equities added 12 percent. Treasuries lost 1.2 percent, a Bank of America Corp. index shows.
Higher arabica prices may raise costs (SBUX:US) for Seattle-based Starbucks and Waterbury, Vermont-based Green Mountain Coffee Roasters Inc. (GMCR:US) Cheaper robusta may help Vevey, Switzerland-based Nestle, which uses the variety to make Nescafe and has about 51 percent of the global instant-coffee market, according to Euromonitor International.
Global robusta supply will exceed demand by 1.2 million bags in the year that begins in October, compared with a 1 million-bag shortage in the current season, according to Winterthur, Switzerland-based Volcafe. Each bag weighs 60 kilograms (132 pounds). Arabica output will outpace consumption by about 800,000 bags in 2012-2013, compared with a 6 million- bag deficit in the current season, the unit of ED&F Man Holdings Ltd., a London-based commodities trader, forecast in a quarterly report in February.
The anticipated gains in arabica prices may be curbed by signs that economic growth is slowing, said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. Prices fell 18 percent in 2008, amid the worst global recession since World War II. The premium to robusta narrowed to as little as 26.1 cents in March 2008, data compiled by Bloomberg show.
The International Monetary Fund expects world growth to slow to 3.3 percent this year, from 3.8 percent in 2011, and Europe to contract 0.5 percent as it struggles to contain a debt crisis. The pace of the recovery in the U.S., the world’s biggest coffee user, has been “extremely sluggish,” Federal Reserve Chairman Ben S. Bernanke said on March 29.
“Coffee is caught in a down trend,” Hellwig said. “We’re concerned with global growth stalling. There’s growth there, but we’re not seeing demand growth exceeding supply growth.”
Hedge funds and other money managers have been betting on lower arabica prices since mid-February, Commodity Futures Trading Commission data show. They held a net-short position of 9,964 futures and options contracts in the week ended March 27. Funds increased their net-long position in robusta during the same week by 8.5 percent to 8,345 contracts, the most since NYSE Liffe started publishing the data in October.
Wagers on robusta may be reversed once Vietnamese farmers accelerate shipments. They sold about 70 percent of the current season’s crop so far, preferring to hold on to beans, according to Volcafe. The start of harvests in Brazil and Indonesia next month and slower domestic inflation probably will spur them to reverse that trend, said Kona Haque, an analyst at Macquarie in London.
Production in Indonesia, the third-biggest robusta grower behind Vietnam and Brazil, may rise 38 percent to 11 million bags in the season starting in April, the Indonesian Coffee and Cocoa Research Institute estimates.
Arabica supplies may be tighter than futures markets are anticipating. While the government of Brazil, the largest grower, has forecast a record crop in the marketing year that begins in July, most of the gains will be in robusta and arabica output may actually decline, estimates Terra Forte Exportacao e Importacao de Cafe Ltda., the country’s second-largest exporter.
Growers of arabica, which will enter the higher-yielding half of a two-year production cycle in July, will collect 37.4 million bags, almost 11 percent less than they did in the previous peak year, Terra Forte predicts. Robusta output will climb to 16.5 million bags, from 14.3 million a year earlier, the Sao Joao da Boa Vista, Brazil-based company forecasts.
The Brazilian government may stockpile beans to help farmers, Agriculture Minister Mendes Ribeiro Filho said in an interview in London on March 29. Brazil exported 27.4 million bags of arabica and 2.7 million bags of robusta in 2011, according to its coffee exporters’ council, known as Cecafe.
Arabica inventories at ICE-monitored warehouses are 41 percent smaller than two years ago, before prices began a rally to a 14-year high in May 2011, exchange data show. Stockpiles may not be replenished soon because heavier-than-normal rainfall in Colombia, the second-biggest grower of the variety, damaged crops. Production may fall to as low as 7.5 million bags this season, a 36-year low, according to Andres Valencia, the marketing chief at the National Federation of Coffee Growers.
“Robusta should weaken over time, as production is going to catch up,” John Stephenson, who helps manage $2.7 billion of assets at First Asset Investment Management Inc. in Toronto, said in an interview. “At the same time, you have demand growth in arabica and fairly tight inventories, so I would expect to see robusta fade a bit and relative strength in arabica.”
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