PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 20, 1997) COFFEE: December coffee futures traded within a range of roughly $1.59-$1.71 per pound during the early part of last week, extending the sideways pattern that has been in place since late September. Prices gained modest support from a decline in certificated stocks as well as reports of crop damage in Mexico and Central America. The stocks news helped firm the December/March premium, which widened to almost 16 cents late last week from about 11 cents at the end of September. Later in the week, futures fell below the $1.59 mark, pressured by origin selling.
September U.S. coffee stocks were reported at 2.29 million bags, down 289,000 bags from the previous month (Table 1). The decline was partly due to seasonal factors (September stocks are below the previous month's level for every year shown in the table), but the size of the drop exceeded most expectations. We anticipate that the monthly stocks level will decline again in October.
An official of the Mexican Coffee Exporters Association has estimated crop losses attributable to Hurricane Pauline at about 100,000 bags, well below initial producer projections of 300,000-400,000 bags. Heavy rains and strong winds also reportedly tore coffee cherries from the trees in parts of Central America, but we have yet to come across authoritative crop loss assessments. (A member of Guatemala's National Coffee Association estimated his country's loss at about 1% of national output.)
The International Coffee Organization (ICO) reported August exports were 4.67 million bags, roughly 77% of the year-ago level. Each of the four coffee categories recognized by the ICO showed declines versus comparable 1996 levels, with the Other Milds category the hardest hit at 35% below last year's amount. Exports for 11 months of the international coffee year that began in October 1996 were reported at 74.5 million bags, up from 68.9 million in 1995/96. The major part of the increase is accounted for by Brazil, whose October-August 1996/97 shipments reached 17 million bags, versus 11.3 million in 1995/96.
Brazil's preliminary September monthly coffee exports figure is 1.26 million bags, the largest exports since May, and about 8.7% above the year-earlier export level. January-September exports came to 10.9 million bags this year versus 7.67 million bags over the same time period in 1996.
September coffee arrivals at Brazilian cooperatives were reported at 1.02 million bags versus 1.61 million a year ago. End-of-month cooperative stocks were reported at 2.86 million bags, down from 4.38 million the previous year.
According to a spokesman for Colombia's National Coffee Growers' Federation, 1996/97 output was formally pegged at 10.8 million bags in that country, 16.7% below the previous season's production level. Exports during 1996/97 were reported at 11.3 million bags, up 4.4% versus the year before. End-season stocks were said to be 4.3 million bags, down from the year-ago level of 6.2 million.
Last week, Colombia's agriculture minister said he expected 1997/98 production to reach “at least” 11.5 million bags, which compares with the USDA's forecast of 11.3 million bags and the Colombian National Coffee Growers' Federation's forecast of 12.0-12.5 million bags. Even though the ongoing El Nino is expected to hurt 1997/98 production, the new season's output is likely to exceed the year-ago level, due in part to more attractive farmer prices and government-sponsored farmer incentives. Because of its importance as the world's second-largest producer, Colombia's 1997/98 crop prospects will be one of the most closely watched market factors for the rest of this year.
On October 16, the Colombian Truckers Association (ACC), which claims to represent about 90% of the country's truckers, announced it would launch a nationwide strike on October 18. However, a rival trucker group, also claiming to have the support of 90% of Colombian truckers, voiced opposition to the strike. Considering the market's price action on October 16-17, it appears that traders have little concern that a disruptive strike will become reality.
The U.S. Climate Prediction Center recently stated that it expected the existing El Nino phenomenon to persist until March- May 1998. Drier-than-normal conditions were expected to continue over the next three months in three important coffee-growing areas–Indonesia, Central America and Northern South America. This year's El Nino, now widely regarded as potentially the most serious of its kind this century, will remain a major market factor over the next few months.
On October 17, futures prices fell to their lowest level since mid-July. The $1.59-$1.71 band now constitutes resistance on the December price charts and we do not expect the upper level to be penetrated over the near- term.
Arthur Stevenson
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