PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(December 12, 1997) COFFEE: Coffee futures posted strong gains early last week, extending a price advance that began in early November. The market's strength reflected production problems in several Latin American growing areas and expectations that the next U.S. stocks figure, due for release on December 15, will show a decline versus the previous month. Later in the week, futures came under downside pressure as rumors a former U.S. agricultural attache in Brazil (now working as a private consultant) was projecting Brazil's 1998/99 output at about 40 million bags.
A sharp rally on December 9 was triggered by a statement from an official of the Colombian National Coffee Federation who said that 1997/98 output was expected to be about 12 million bags, down from earlier projections of about 12.5 million. In response, March futures closed 885 points higher for the day. The new forecast mirrored growing uncertainty regarding the true impact of El Nino-related weather anomalies, and was modified just two days later when Federation's production manager claimed that drought and insect pests had trimmed 1997/98 output by 1 million bags versus earlier expectations. Some Colombian weather specialists believe that dry conditions will prevail over much of the country's coffee areas owner the next four to five months, raising the possibility that crop prospects will further deteriorate. For the time being, the Colombian crop remains a price-supportive market consideration,
Colombia has just completed a four-year coffee survey, which established the nation's coffee area at 869,158 hectares, down 13% from 1980 (when the last comprehensive survey reportedly took place). The survey found that out of a potential total coffee area of 4.5 million hectares, only about 20% of the land was devoted to that crop. Also, the survey established that the borer worm (broca), a destructive insect pest, was found over roughly 80% of the countries coffee area, with much of its recent expansion facilitated by El Nino-induced dry conditions.
Coffee is produced in 16 of Colombia's 32 departments, and we are identifying these departments, along with their respective coffee area, in Table 3. The table may serve as a useful reference point for traders trying to gauge the relative importance of crop news or developments pertaining to particular growing areas of the country.
The market has been supported by recent export data released by trade groups in various Latin American origins. While not unexpected, these numbers are generally below year-earlier levels and have refocused attention on production problems and harvesting delays in various origins. The preliminary, export data for November show the following changes versus a year earlier: Mexico-304,474 bags, down 5% (December exports are projected at about 390,000 bags, little changed from a year ago); Costa Rica-100,940 bags, down 32%; and Honduras-50,810 bags, down about 70%. In Brazil, the Federation of Coffee Exporters (FEBEC) has projected December exports at about 1 million bags versus 1.53 million shipped in December 1996. Trade expectations had been that Brazil's 1997 shipments would reach 15 million bags, but FEBEO has now scaled this back to about 14.26 million.
Last week, the New York Coffee, Sugar & Cocoa Exchange confirmed that its coffee committee had approved the following proposals: (1) accept washed Brazilian arabica coffee for delivery against the futures contract, with the coffee valued at a 400-point discount to the basis; (2) recognize Hamburg, Germany as a delivery point on a par with New York; and (3) recognize Panama coffee under the New York contract. These proposals are subject to approval by the exchange's board of managers.
We continue to look for higher prices over the longer term. Near term, the market appears “toppy,” and we would not be surprised to see a pullback. March has nearby support at about 174 and 170 cents per pound.
Arthur Stevenson
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