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(October 27, 1997) COFFEE: December
futures fell below $1.60 per pound on October 17 and breached the
$1.50 level just four trading sessions later, on October 23. The
market has disregarded several potentially bullish factors such as
a strike by Colombian truckers, and appears to be focusing on
bearish fundamentals, chiefly the improved production outlook for
1997/98 and 1998/99. The dominant role of negative factors also was
reflected in the spreads, with December futures trimming their
premium to March to about 9 cents last week from 16 cents as
recently as October 13.
The Colombian Truckers Association (ACC),
which claims to have the support of 90% of the country's truckers,
called a strike on October 19 in an attempt to force freight
companies to honor a freight rate agreement reportedly concluded in
April. The effectiveness of the strike was difficult to gauge given
that a rival trucker organization (also claiming the allegiance of
90% of the country's truck drivers) voiced opposition to the
strike. A spokesman for the National Coffee Growers Federation
stated early last week that the strike could prevent as much as
100,000 bags of coffee from being exported in October. A
governmental offer to mediate between the parties was rejected by
the ACC on the grounds that it was not prepared to negotiate over
an issue that presumably had been negotiated and settled. In the
middle of the week, the ACC called a temporary halt to the strike
so as not to disrupt municipal elections on October 26. We assume
that the strike will be resumed in absence of an agreement with the
transportation companies.
Colombia's National Coffee Growers
Federation last week reduced its expectation of October-December
production to 4 million bags from earlier forecasts of around 4.5
million. The reduction was prompted by a reassessment of El Nino-
related dry conditions in July and August. Local weather
specialists believe that the El Nino's most extreme impact will be
felt during the first few months of next year, and that large areas
of Colombia's coffee zone will experience extremely dry
conditions.
At a recent meeting of Latin American agricultural
specialists, the conclusion seemed to be that the overall El Nino
impact on agricultural output could not yet !be defined. Some Latin
American governments have set up funds to deal with the situation,
while others are organizing public works projects to repair or
improve damaged infrastructure. There was agreement that the El
Nino's impact could potentially be severe, and some delegates
stated their countries were “bracing for the worst.”
Obviously, El Nino-related crop developments will remain relevant
for several markets (including coffee, cocoa and sugar) over the
next few months.
At last week's meeting of Central American
members of the Association of Coffee Producing Countries (ACPC),
delegates expressed concern over the recent decline in
international coffee prices. Intent on telling the coffee community
that “the harvest is not going to be what the market
wants,” the member countries (Costa Rica, Ecuador, El
Salvador, Honduras and Nicaragua) adopted an overall export quota
for the 12-month period beginning in July of 8.57 million bags; the
ACPC had previously authorized an export ceiling of 8.92 million
bags. Exports for July-December were set at 3.45 million bags, with
two member countries (Honduras and Nicaragua) claiming that El
Nino-related production problems might make it impossible to meet
the reduced export targets.
At a meeting of Brazil's Deliberative
Council for Coffee Policy attended by the Minister of Industry and
Commerce, the government committed itself to sponsoring and
coordinating an effort aimed at developing a forecast of 1998/99
(May/April) national coffee production. In order to ensure that the
figure will be viewed as credible, the methodology used will be
outlined in press reports. Participants in the crop survey are to
include university personnel and state agricultural officials. No
deadline for completion of the survey has been set.
Trade reports
from Southeast Asia indicate that favorable growing conditions
could lead to a bumper Vietnamese crop in 1997/98, with some
traders looking for a production increase of about 10% from
1996/97. Exports in 1997/98 have been tentatively projected at
about 5 million bags, up from 4.7 million in 1996/97. It is
possible that overall quality will improve in the new season
because recent weather conditions have facilitated the drying
process.
Vietnam's improved production prospects and the
depreciation its currency point have resulted in a more aggressive
marketing pace, which has recently contributed to weakness on the
London terminal market. The New York premium was at its widest in
early September on fears of a robusta shortage, partly El Nino
induced. Those fears have become less acute and, in conjunction
with weaker arabica values, have led to the premium's
narrowing.
The near-term price trend remains negative. December
futures have light support at about $1.45, and an upward bounce
seems overdue. We would want to see December trading through the
$1.70 level before concluding that the bulls are back in the
driver's seat.
Arthur
Stevenson
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