PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
212-776-1000(March 13, 2000) COFFEE: Coffee futures have traded with a strong upside bias since the beginning of March. The better tone has reflected a pickup in manufacturer buying interest, and a discounting, at least for the time being, of earlier negative factors. Bulls also have been encouraged by two factors: (1) recent indications that, depending on rainfall conditions, Colombia's upcoming main harvest could be in trouble; and (2) renewed talk that some Latin American origins are considering some new form of withholding.
Recent trends in the New York/London arbitrage, basis May futures, show that the New York premium, which was briefly above 80 cents per pound in early December 1999, has narrowed appreciably to 55-60 cents in late February. It has recently widened by a few points, and was trading near 64 cents late last week.
The market seemed awash with talk last week that Brazil, in conjunction with Colombia, might take a new coffee-withholding initiative, which was reinforced by reports that officials from the two countries would examine the issue in Brasilia on March 14. This idea seems related to a February 17 announcement by the Brazilian Ministry of Agriculture that 500 million real would be made available for coffee retention this year. (According to the Ministry, these funds would allow growers to retain roughly 5 million bags of coffee.) The main purpose of the financing plan was to lessen selling pressure on producers, many of whom had held their coffee in hopes of a price recovery. Traders' retention expectations, or hopes, were reinforced during the February 28 meeting of Mexican and Central American coffee specialists in Guatemala City, with some participants stating they would explore the possibility of "organizing supply flows to the coffee market." Following the meeting, an official of the Mexican Coffee Producers' Confederation stated that regional producers might form a "block" in order to "organize" coffee movements and defend prices.
The Association of Coffee Producing Countries (ACPC) is expected to meet on March 20, and presumably a discussion of various retention proposals will head the agenda. We are doubtful that a new withholding initiative, found credible by the market, will be adopted. A major problem is the difficulty in finding financing and, in some instances, weak political commitment. For instance, Mexican exporter interests reject the notion put forward by producers that the World Bank would be willing to underwrite a new withholding plan, and it seems doubtful that the free-market posture of the Mexican government is compatible with the type of intervention visualized by producer interests. We believe that the most likely outcome of the March 20 meeting will be a ringing endorsement of the ACPC's existing export plan and the announcement of some relatively minor statistical adjustments in the plan.
The new U.S. agricultural attache report for Brazil has projected the country's 1999/2000 coffee output at 27 million bags, roughly 2% above the previous forecast. The 2000/01 harvest was projected at 28.1 million bags, in line with general trade expectations. In our December 22, 1999 Long-Term Coffee Outlook report, we forecast the 2000/01 crop at 27.8-30.0 million bags.
Tree flowering in Colombia is characterized as "excellent" by local coffee officials, and the National Coffee Federation has projected the upcoming main crop (October-December) at about 5 million bags, substantially above the year-ago level of 2.51 million. For the moment, that forecast strikes us as too optimistic. A USDA representative in Colombia recently projected the main crop at 4.0-4.3 million bags, but cautioned that if heavy La Nina-related rains persisted, especially through March and April, the main crop could decline by up to 40%. We expect the Colombian crop outlook to remain one of the market's most closely watched fundamental developments, especially over the next few weeks.
Certificated stocks were reported at 1.25 million bags as of March 8, up from the roughly 100,000-bag level of late January 1999. Mexican coffee accounted for 416,460 bags (33.4% of total certificated) as of March 8, up from the January 31 level of 300,740 bags. Almost 99% of all Mexican coffee accepted by the New York Board of Trade for delivery against futures is located in New Orleans warehouses. This situation reflects the steep discount of most Mexican coffee differentials, making delivery against futures relatively more attractive. We anticipate that the level of certificated stocks from Mexico may build further.
Monthly green U.S. coffee roastings are relatively uniform on both an intra-year and inter-year basis. Roastings for 1999 were reported at 17.76 million bags, virtually unchanged from the 1998 level. Very little year-to-year variability exists in the annual U.S. roastings figure; for the 10-year period of 1990-1999, the lowest figure is 17.18 million bags (1994) and the highest is 18.37 million (1991). U.S. coffee bean roastings show less year-to-year variability than virtually any other major coffee statistic.
In a sign of the times, the London International Financial Futures and Options Exchange (LIFFE) announced last week that it was terminating the traditional form of trading coffee and switching to electronic trading. The move will occur during the fourth quarter.
We are maintaining our constructive near-term price perspective. The May chart shows resistance at the 110- to 111-cents-per-pound level.
Arthur Stevenson
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