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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(August 11, 1997) COFFEE: Coffee futures advanced to new highs for the move last week, propelled by concern regarding near-term availability of quality milds. The possibility of a Brazilian dockworker strike also provided support for market bulls. The advance took September futures prices through the $2 level, where it last traded in early June. Spread relationships also strengthened, with December widening its premium over March to about 20 cents, up from about 9 cents in early July.
The latest export data from the International Coffee Organization (ICO) shows June shipments were down versus a year ago for Colombian milds and other milds, the two categories containing renderable growths against New York futures. June exports increased slightly versus last year for robustas and Brazil and other arabicas, which are the non-tenderable coffees. This broad snapshot partially explains why the spreads keep widening: Traders are questioning the availability of renderable coffee against the September contract. August 21 is the contract's first notice day.
Certificated coffee stocks were reported at 90,929 bags as of August 6. While this represents a slight expansion from about six months ago, when stocks had virtually dipped to zero, stocks remain at a very low level. This is especially true when considered in an historical context. In much of 1992 and 1993, stocks exceeded 5 million bags; during early 1995, certificated stocks were above 1 million bags. The low level of certificated stocks is obviously a factor in ongoing availability concerns.
It seems that labor instability at Brazilian ports is a permanent fact of life as Brazilian dockworkers had called for a nationwide strike to begin August 11. However, workers at several ports. e.g., Paranagua and Vitoria (an important port for robustas). indicated they intended to maintain normal operations, so the strike's potential effectiveness was in doubt from the start. Futures prices plunged on August 6, apparently in response to news that Brazil's Transport Ministry had offered to meet worker pay demands, thus removing the threat of a dockworker strike. If a docker strike were to occur, its market impact would depend on its duration and overall effectiveness. Any Brazilian dockworker strike would be relatively painless for the coffee market unless workers effectively closed Santos, the country's leading coffee port.
Agronomists in Brazil recently stated that the country's 1997/98 harvest is about 60%-70% complete. July harvesting conditions were described as excellent, which could indicate a pick up in August exports. (Heavy rains throughout June slowed harvesting, reducing the export level through July.) The Brazilian Association of Coffee Exporters, which in May forecast the 1997/98 crop at 24 million bags, stated in early August that a new round of field surveys was underway, and that an updated crop forecast would be released in September.
The Hamburg-based trade firm Rothfos has projected Brazil's 1997/98 output at 25 million bags (20 million arabicas; 5 million robustas), well below the USDA's 28-million-bag forecast. We look for the final figure to come in between 25 million and 26 million bags.
Both crop and harvesting conditions in Brazil remain good. However, more rain is required in other Latin American coffee- growing areas, such as Central America, Colombia and Mexico. If the El Nino causes protracted dry conditions in these areas, both coffee quantity and quality probably would suffer; harvesting delays could be another likely result. This time of year is a relatively dry period in West Africa, but soil moisture conditions in the region's major coffee areas remain favorable. Like in Latin America, dry conditions would have to persist before causing significant crop damage.
Precipitation was favorable for this year's Indian coffee crop, and local coffee officials are projecting a 1997/98 crop of about 230,000 tonnes, up from 180,000 tonnes in 1996/97. The improved availability outlook has caused domestic prices to soften. According to the country's Commerce Minister, the crop's apparent success also has ruled out the potential need for imports late in the year.
An official of Colombia's National Coffee Growers Federation confirmed that September export registrations would open this week. While some exporter interest would like to see a reduction in the 30-cent-per- pound premium over the official export price, the official confirmed that it would be maintained.
The Secretary General of the European Coffee Federation confirmed last week that his organization was opposed to a proposal to reduce the size of the New York futures contract to 125 bags from 250 bags. He maintained that such a change would raise business costs for the coffee industry and would weaken the link between the futures and cash market. The exchange's coffee committee has proposed that the size of the contract be cut in half for trading, not delivery, purposes. The proposal has yet to be reviewed by the exchange's board of directors and was not on its August agenda; the proposal could be reviewed during the September meeting.
We remain friendly on both an outright and spread basis over the intermediate term. Near term, we would not be surprised to see a downside correction, especially since most of the recent strength seems driven by speculative buying, with many cash traders skeptical about tightness concerns. However, we would look for the September contract to hold above the 185- to 190-cent level on a near-term correction.
Arthur Stevenson
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