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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(December 8, 1997) COFFEE: Coffee futures began to firm in early November, gained further upside momentum later in the month and accelerated their advance last week. The price strength reflected concern about the availability of Latin American arabicas, relatively low U.S. stocks and a strike at the Brazilian port of Santos.
Central America is currently a “problem area” for the coffee market. Unusual weather patterns (e.g., El Nino-induced drought, followed by torrential rains and strong winds) have hurt 1997/98 production prospects, hampered harvesting, delayed harvesting peaks and created quality problems. This situation has supported coffee futures. In Guatemala, a spokesman for the National Coffee Association characterized this year's weather as “crazy,” noting that in some areas flowering (normally not expected until February) was already taking place.
Central America's unsatisfactory coffee situation was reflected in Guatemala's November exports of 402,597 bags. While this figure was 1.8% above the year-ago level, it fell short of expectations from two to three months ago. In the same context, El Salvador's November exports of 123,999 bags were about 12% below the year-earlier level.
Cooxupe, a coffee cooperative based in the Brazilian state of Minas Gerais, last week projected national 1998/99 (May-April) output at 28-34 million bags. The cooperative noted that tree flowering had been quite strong throughout the country's coffee belt, with the notable exception of Espirito Santo, which produces roughly 65% of Brazil's robusta output. Cooxupe's findings are in general agreement with predictions released by other sources.
Weather specialists in Colombia anticipate that dry conditions caused by El Nino will persist into the first half of 1998, and that “normal” weather conditions will not return until the second half of the year. The market's concern about this situation was summarized by an official with Colombia's National Coffee Growers Federation, who stated several days ago that “lack of rain in the coffee region could have considerable negative effects on the crop.” Clearly, the potentially bullish impact of this situation will hinge on the market's reading of Colombian production prospects over the next two to three months.
A request by Mexico's National Coffee Industry Association, which represents the country's principal roasters, for authorization to import duty-free robusta coffee was turned down by the government earlier this year. Last week, the planning undersecretary at the Agriculture Secretariat, however, acknowledged that he foresaw a clear trend toward robusta imports for blending with domestic arabicas to produce soluble coffee. This development was viewed as necessary in order to make soluble manufacturers more competitive in the international market.
We view the market constructively, and look for a test of the early September highs. We expect price action to remain choppy, and look for pullbacks to hold near $1.60 per pound, basis March futures.
Arthur Stevenson
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