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MERRILL LYNCH & CO.
North Tower, 21st Floor, New York, New York
(November 26, 1997) COFFEE: On a global basis supplies of coffee are the tightest in decades. There is no denying this. The Central American crops are late rather than early. The Brazilian 1997-98 crop was small and government stocks will need to be reduced to meet export demand. There is uncertainty about the Colombian crop due to broca and potential for more of the crop not to be of exportable type coffee. Mexican output was reduced from its potential due to two hurricanes sweeping across parts of the coffee region and the south Asian crops were impacted by El Nino. Despite all these difficulties, the market might have a trouble sustaining rallies much beyond present levels.
The tightness in the market might not be as keenly felt as last season for a number of reasons. First, consumer stocks are more adequate and the pipeline was filled with exports of more than 80 million bags between October 96 and September 1997 against import nations consumption of anywhere from 74-76 million bags. Roasters have adjusted blends to reduce mild Arabic requirements. Physical premiums have not strengthened, suggesting the roasters might have better coverage and are not willing to pay up for coffee as they did last year. As the crops arrive, strong competition will exist among the sellers. Furthermore, there is widespread talk that the Brazilian 1998-99 crop is going to be a whopper with several sources citing it could be as much as 40 million bags. Other origins are apt to be active sellers trying to sell in advance of this crop coming in mid-year.
Thus the window of opportunity for the market to rally is immediately upon us before the Central American crops come in, but thus far the market seems to be coping with this tightness. If not now, the chance of strong upward move is greatly reduced and will be possible only if the crops are even less than currently forecast. Strikes/port delays are not justification enough in our opinion.
(Reprinted by permission. Coypright © 1997 Merrill Lynch, Pierce, Fenner & Smith Incorporated.)
Judith Ganes
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