PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
212-778-1000
(March 27, 2000) COFFEE: May coffee futures have been trading in a range of about 98-110 cents since late February. This period of relative price stability represents a partial discounting of the negative fundamentals that kept futures under downside pressure in January and February. Upcoming producer talks (April 4-5) on a stocks-withholding program and Colombia's production problems also helped to interrupt the market's downside momentum.
Figure 1 shows the recent trend in the May/July spread. The spread has weakened appreciably over the last four months, with May's discount widening from about 115 points in early December to about 300 points in mid-March. Modest firming has occurred over the last few days, with the discount at roughly 240 points late last week.
Figure 1
May/July 2000 Coffee
Source--CQG
Newswire reports last week, quoting a warehouse affiliate of the Colombian National Coffee Federation, stated that fermentation problems had degraded 42% of the Federation's parchment coffee, rendering it unsuitable for the export market. Based on a relatively optimistic scenario, according to the affiliate, the Federation holds about 0.5 million bags (green equivalent) of export-quality coffee. Combined with a similar amount held by private exporters leaves the country with roughly 1 million bags of export-grade coffee. That is a low figure by historical standards, especially in light of adverse weather conditions that suggest the next main crop (October-December) could be relatively small. Federation representatives, while acknowledging that a large proportion of their stocks consist of relatively old coffee, dispute the affiliate's conclusion and claim the proportion of exportable coffee is far higher than suggested by the affiliate.
It has been an open secret that Colombia's faltering production outlook and low stocks level made it all but inevitable that the country might have to be a large-scale importer of coffee this year. Market talk indicates that about 1 million bags, and possibly as much as 1.5 million bags, of semi-processed coffee might be imported. Last week, the National Coffee Federation's general manager confirmed that the question of coffee imports was being examined and that a formal statement would be made "in a few weeks." He did not quantify import needs, but emphasized that imports definitely were necessary to maximize the availability of quality beans for the export market. He indicated that the import program would likely be in place toward year's end.
Colombia's production and export woes have led to an erosion of its market share in several major importer markets. Recently, a member of Holland's import trade stated that despite the preference traditionally afforded Colombian beans by quality-conscious northern European consumers, Colombian 1999 exports to the European Union were down roughly one-third vis-a-vis 1998. European processors were substituting coffee from Central America (particularly Guatemala and El Salvador) for Colombian beans, so were not experiencing a coffee shortage. European importers believe that Colombia is pricing itself out of the market, and have stated that in order to become more competitive, the country needs to cut its export premium to 4 cents per pound from its current level of 13 cents.
No fresh news emerged last week regarding the April meeting of the Association of Coffee Producing Countries (ACPC). Brazil and Colombia have indicated that they support in principle some sort of stocks-retention scheme, with Colombia reportedly thinking in terms of a 5- to 6-million-bag level. A retention scheme can only be regarded as potentially price-supportive if it is viewed as credible by the world market. The plan's credibility hinges on several factors, including the availability of stock financing and expanded ACPC membership. Various important origins, including Guatemala, Mexico and Vietnam, have voiced opposition to an official retention plan.
Vietnamese coffee growers, who had been withholding coffee to protest low prices, were said to have resumed sales to exporters, although selling activity reportedly was very slow. The London robusta market has been under sustained downside pressure, with May futures currently trading about $400 per tonne below the level of four months ago. Farmers reportedly were offering coffee at about $170-$180 under London futures, while exporters' bids were closer to the $200-discount level.
There is very little month-to-month or year-to-year variability in the monthly U.S. green coffee roastings, so much so that the roastings data are almost constant when compared to numerous other coffee statistics. We cannot draw any fresh conclusions from the data.
The major near-term fundamental development is the April 4-5 ACPC meeting, which the market will await for news regarding a possible future stocks-withholding plan by producers. We lean to the upside in this market, but would need to see the May contract trade through the $110-$111 level before becoming more enthusiastic about the market's upside potential.
Arthur Stevenson