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PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 6, 1997) COFFEE: Coffee futures moved lower early last week, with December futures testing $1.60 per pound, their lowest level since late August. The market was undermined by several factors, including: (1) improved Brazil precipitation patterns; (2) talk that Colombia might reduce its 30- cent export premium; (3) market talk indicating that El Nino- related crop damage in Latin America might be less than anticipated; (4) origin selling; and (5) relatively little roaster buying interest.
The apparent easing of concern regarding Other Milds availability has not spilled over into the robusta sector, as is illustrated by the narrowing of the New York/ London differential. El Nino-related dryness is expected to reduce Indonesian output, lending relative strength to London futures. However, it may be that Indonesian exporters will now become more aggressive, perhaps reflecting the rupiah's weakness as well as the need to meet Vietnamese competition.
Brazil's National Monetary Council last week authorized a credit line of 300 million real to help finance the 1998/99 coffee crop. Individual farmers would be entitled to a maximum of 1,000 real per hectare, with an overall ceiling of 100,000 real. (A U.S. Dollar equals about 1.1 Brazilian Real.) While we have not heard precisely when and how these monies are to be disbursed, we view this measure as being potentially price-supportive, in that it decreases the pressure on growers to sell their crop quickly.
Brazil's Deliberative Council for Coffee Policy will hold a meeting October 8 to consider and fine-tune various aspects of coffee financing. (Farm stock loans, for example, will be on the agenda.) This meeting will be followed by a more formal one at Santos on October 14, which will include the Minister of Industry and Commerce.
The Brazilian Association of Coffee Exporters (ABECAFE) stated last week that New York's Coffee, Sugar & Cocoa Exchange was examining the possibility of adding Brazilian washed arabicas to the coffee types that are renderable against the CSCE coffee contract. According to ABECAFE officials, Brazil produces roughly 1 million bags of washed arabicas (roughly 5% of its 1997/98 harvest).
The general manager of the Colombian National Coffee Growers Federation last week projected the country's October-December production at 4.5 million to 4.7 million bags. Production for the 1996/97 season (October/September) was estimated at 10.7 million bags, in line with earlier projections. Domestic consumption for the year was estimated at 1.6 million bags, while stocks were said to have fallen by roughly 1.8 million bags. It was confirmed that the 30-cent export premium remained in place, but that possible changes in the premium might be considered.
A clear picture has yet to emerge regarding the scope of El Nino-related crop losses in Colombia. Last week, farmers in Risaralda (Colombia's sixth largest coffee-producing department) protested governmental coffee policies, especially as they apply to profit margins. Some of the farmers claimed that dry weather destroyed half their coffee crop and that further losses could be expected given the inroads that destructive insects have been given courtesy of the hot, dry conditions.
In El Salvador, the Foundation for Coffee Research projected the 1997/98 crop at 2.4 million bags, about 2% below its April forecast. The reduction was attributed to smaller average cherry size, linked to El Nino- related dryness. While the final impact of El Nino will not be known for some time, the Foundation concluded that the country's coffee trees had escaped “widespread” damage, which appears also to be the case in other Central American origins.
A representative for Ethiopia's Coffee Authority stated last week that drought conditions, which were reported for some areas of East Africa, were not a problem in his country and that 1997/98 coffee output was projected to be unchanged from the year-ago level.
Maxwell House announced last week that it would follow the example set by Folgers and reduce the list price for its 13-ounce cans of coffee by 30 cents, effective November 3.
The Colombian cash price reached a high of about $3.18 (average) in May, but slipped to $1.93 in August; the cash premium to New York futures has fallen from its May high of about 58 cents to 6.6 cents in August. The Mexican differential has been relatively subdued, falling from a May average of 2.6 cents to a 3.0-cent discount in August.
Roasters in the United States and Western Europe appear to be well covered and may not resume active buying for several more weeks, thus depriving futures of a potential source of support. Also contributing to the weaker tone is the downplaying of weather-related crop damage in Latin America. In the absence of a new bullish fundamental development, prices are likely to erode further, with a possible move to the $1.55 area, basis December.
Arthur Stevenson
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