PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(June 30, 1997) COFFEE: Following the sharp price decline that began in late May, coffee futures traded in a sideways fashion last week. The market's steadier tone represented a general discounting of recent, bearish availability perceptions. The enormous amount of news wire and press coverage of El Nino-related weather distortions also may have caused some traders to become more friendly to the market.
The former U.S. agricultural attache in Brazil, now working as a private consultant, is believed to have released a 1997/98 Brazil production forecast of 28.0-28.5 million bags, which is 6-7 million bags above projections released by various Brazilian exporter representatives. This latest number is about the same as the USDA's June 12 forecast, which was all but ridiculed by Brazilian sources at the time. The commodities secretary within Brazil's Industry and Commerce Ministry declared that the USDA's figure (and therefore, by extension, the attache's) “made no sense,” and confirmed that Brazil's government expected the 1997/98 crop to come in at around 21-22 million bags. (Be aware that this figure is not an official government forecast. The government currently is weighing various procedures and methodologies to see how “official” production forecasts, discontinued in 1991, might be reinstated.)
Colombia's National Coffee Growers' Federation is projecting 1997/98 (October- September) output at 12.0-12.5 million bags, up from about 10.2 million in 1996/97. The USDA's forecast of 1997/98 output at 11.3 million bags is substantially below the Federations figure and supported by some private Colombian exporter interests. The USDA's revised estimate of Colombia's 1996/97 outturn is 10.3 million bags, down from its initial forecast of 12.5 million.
Table 1 shows the USDA's initial forecasts of 1997/98 output for the world's leading origins, with the 12 countries shown accounting for roughly 79% of global output. Only two of these producers (Indonesia and Ivory Coast) are expected to see output decline in the upcoming season. World output is forecast to reach a record 103.7 million bags in 1997/98, up 2.9% versus 1996/97; almost one- third of the overall increase is expected to come from Vietnam.
Vietnam's production performance constitutes one of the coffee market's greatest success stories in recent years. The government-led drive to boost output makes it likely that the country will produce about 5 million bags in 1997/98, double its output in 1993/94, and giving it a growth rate unmatched by any of the world's leading origins (Table 1). Recently the government launched an effort to boost arable output, claiming that the current area of 17,000 hectares (out of total coffee area of about 220,000 hectares) would be increased to 40,000 hectares by 2001. The lack of large, modern processing facilities means that much of the country's coffee must be processed at the farm level initially, causing quality problems that the government is attempting to address in its current coffee plan. According to an official with the Vietnam Coffee Export- Import Corporation, these quality problems lower the price of Vietnam's coffee exports by about $100-$150 per tonne versus comparable coffee grades sold by various regional competitors such as India, Indonesia, and Thailand.
As they have done with respect to cocoa, the Ivory Coast's creditors (World Bank, International Monetary Fund) are urging that country's government to terminate its role as an exporter and turn coffee marketing over to the private sector. The World Bank and the Ivorian government reportedly have agreed that “liberalization” of the coffee sector will take place in 1998/99, although we doubt that the governmental export monopoly will effectively end at that time. As has been the case with cocoa, some consumer interests have expressed reservations regarding various aspects of the free market system, fearing, for instance, that the absence of a governmental role will reduce quality standards.
In the last few months, U.S. monthly green coffee imports have been running ahead of last year's level; January-April imports were reported at 7.2 million bags, up 8.3% from year-ago figures. We anticipate that the monthly import level will continue to exceed last year's pace for the next three to four months.
LIFFE officials last week announced they would review the futures contract's coffee grinding criteria, stating: “the application of a specific defect count for moldy beans has increased the amount of coffee that is currently being graded as non-tenderable.” The specifications in question, introduced in 1996, were designed in part to attract more Asia-based business. However, critics contend the net effect has been to raise the amount of low-quality coffee being tendered for grading. The exchange's review likely will take several months.
We expect the market's price action will remain range-bound over the near term, and look for September futures to gyrate between $1.50 and $1.90 per pound.
Arthur Stevenson
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