PRUDENTIAL SECURITIES, INC.
One New York Plaza,
New York, New York

(May 5, 1997) COFFEE: Coffee futures showed renewed strength last week, with the July contract making several new highs, the latest at $2.25 per pound. The market's strength also was evident in the spreads, with May/July widening to about 33 cents and July/September widening to about 25 cents. Several factors supported the upmove, including: (1) low shipment levels from various Latin American origins; (2) concern about the production outlook for Brazil and Colombia; and (3) the declining certificated stock level. New York's price structure continued to contrast with that of London, where nearby futures were trading at a discount to the back positions.

Costa Rica's Coffee Institute reported March exports at 161,844 bags, down 20% from a year ago (February exports also were well below the year-ago level). However, January-March exports of 543,765 bags were 15% above the previous year's level. Thus, the quarter's entire increase in coffee shipments over the 1996 level came from January's exports. This illustrates the strong forward sales policy that has been adopted by Costa Rica and several other Latin American producer nations, which is contributing to the market's current price strength.

The Mexican Coffee Producers Federation recently released a 1997/98 production forecast of 4.2 million bags, up from the current-season output of roughly 3.8 million. The increase was attributed not only to favorable growing conditions but also to the upcoming strong year in coffee's two-year yield cycle. The Federation's 1997/98 forecast is sharply below a governmental projection of 6.3 million bags, which producer interests have rejected as unrealistically high.

The German trade firm Bernhard Rothfos released its 1997/98 Brazilian production forecast at 24.0-25.5 million bags, down from the year-ago figure of 30 million. This estimate was in line with general trade expectations.

Table 1 shows Brazil's monthly coffee shipments. While first- quarter shipments of 3.89 million bags are more than double those of a year ago, they are well below the export level of the fourth quarter in 1996. One focus of market attention over the next few weeks will be the pace of Brazil's future marketings.

Table 1
Brazilian Coffee Exports
(60-kg bags)

Does not include soluble coffee.
Source--Brazilian Federation of Coffee Exporters

F.O. Licht, the German commodity publishing firm, has projected global 1997 consumption at 74.2 million bags, 1.7% below the previous-year level; the figure assumes that the prevailing higher retail prices will hold for the balance of the year.

Clearly, the potentially adverse impact higher retail prices may have on consumption is a long-term market concern. In this context, a trader specializing in the East European coffee market noted that firmer world green coffee prices had reduced Russian imports; these levels were likely to fall further given the inability of domestic consumers to absorb any pass-through in price increases by Russian roasters. Consumer prices have been rising in various markets; the most recent example is in Portugal where roasters stated last week that retail prices would soon rise by about 10%.

Certificated coffee stocks were reported at 48,603 bags as of April 25, down 12,496 from the previous week. A further decline of 4,935 bags occurred over the next three days. The low stocks level remains a constructive market factor, as does the May futures' relatively large open interest.

We remain bullish, but believe market action may become more choppy at the current lofty price levels; further price strength may be more labored. Near term, the market seems overdue for a downward correction, but we expect July futures to find support near $2.

Arthur Stevenson

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