Outlook for Arabica Coffee Futures in 2009

by Marianna Gomes
(Buenos Aires)

So where can we expect ICE Arabica coffee futures to move over 2009, given that last year saw an 18 per cent fall in prices due in large part to increased exports from Latin America?

Recently, the price of coffee futures hit a 3 month high, which was partly due to exporters forecasting a likely fall in shipments of coffee from the world number one producer, Brazil.

In fact, current estimates are that Brazil will export around 25.1 million bags of coffee beans in 2009 (where 1 bag of coffee is 60kg or 132 lbs.) compared to just over 26 m bags in 2008.

Against a backdrop of an anticipated recovery in commodity trading activity across the board, there is a growing view that more money will soon start moving back into the commodities markets.

With Arabica coffee futures recently up around $1.19 per pound on ICE Futures US, and a likely fall in the harvest from Brazil, coffee bulls could be eyeing up to $1.30 over coming months.

Let’s take a closer look at the supply side of the equation. The Brazilian Agricultural Ministry, Companhia Nacional de Abastecimento (or Conab), recently carried out a study into coffee bean production in a number of the key states.

Conab estimates that national production of coffee, both Arabica and Robusta, may fall by between 15.6 per cent and 19.8 per cent to around 37 m bags, well down on an earlier estimate of around 50 m bags (2008: 46 m bags).

Of these changes, Arabica coffee (75 per cent total plantings) is estimated to be between 26.8 m and 28.3 m bags (35.5 m ; 2008). The Robusta variety (25 per cent Brazilian output) is estimated to be between 10 m and 10.5 m bags.

Among the reasons are:

Entering a slow period in the biennial cycle in Arabica coffee growing areas

Irregular rainfall

High temperatures

Farmers cutting back investment on fertilizer and levels of pruning which affect productivity

The Conab study included the major Arabica coffee state of Minas Gerais, which accounts for around 46 per cent of total production in Brazil, and about two thirds of the Arabica coffee bean harvest.

So if these conditions persist going forward then the coffee commodity market could see some interesting development in the price action of ICE Arabica futures.

Last year coffee represented about 3.002 per cent of the DJ IG Commodity Index, and after the annual adjustment the 2009 component for coffee in this index falls to 2.973 per cent.

Commodity Index investment funds are expected to be net sellers of coffee futures contracts over the coming days in order to meet the new proportions for the coming year.

Given the apparent tightening in the fundamentals as suggested by data such as the Conap survey, we could reasonably expect to see some upside in the ICE Arabica coffee futures price going forward.

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