wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(October 13, 1997) COFFEE: Coffee futures trading was extremely choppy last week, with price action responding to contradictory news developments concerning exports and weather. However, prices held above the previous week's lows. The action in spreads was steadier, with December's premium to March widening to about 15.0 cents per pound from 11.0 cents at the end of September.
On October 3, Colombia announced that the 30-cent premium on its coffee export registration price was being reduced to 16 cents. In the words of the country's finance minister, this move “makes Colombian coffee more competitive...in a market that is no longer a seller's market.” The more competitive export price was expected to bring fourth-quarter sales to about 3.5 million bags. The price announcement was interpreted negatively, causing December futures to settle down 7.80 cents on October 7.
Market strength on October 6 and 8 appeared to reflect concern that strong winds and heavy rains associated with Hurricane Pauline might cause crop losses in the Mexican states of Chiapas and Oaxaca as well as in parts of Central America. (Coffee in some of these areas is now ready for harvesting, making the cherries more vulnerable to adverse weather conditions.) Coffee officials in El Salvador and Guatemala expressed concern about the situation, but there is no news yet about the scope of the problem. (A general comment, attributed to an official of Guatemala's National Coffee Association, was that about 1% of the country's coffee had been lost.)
The Association of Coffee Producing Countries (ACPC) has projected global 1997/98 output at 97.4 million bags, about 3.1% below the year-ago level. (The decline was attributed mostly to reduced production in Brazil and Indonesia.) This contrasts with the USDA's forecast (released in June) of 103.7 million bags, which was 3% above the 1996/97 level. Despite the expectation of lower output, the ACPC cautioned that the price impact would be softened given the likelihood of consumer stocks accumulation. Other 1997/98 production forecasts released by the ACPC (with 1996/97 data in parentheses) included: Brazil, 24 million bags (28.5 million); Colombia, 12 million bags (10.5-10.7 million); and Central America, 18.2 million bags (17 million).
According to estimates released by the Agriculture Department of the Brazilian state of Espirito Santo (where roughly 70% of the country's robusta coffee is grown), robusta output in 1997/98 (May-April) came to 2.44 million bags (versus 3.28 million the previous year); 1997/98 arabica production was 992,000 bags, down from 1.69 million in 1996/97. Most of Espirito Santo's robusta farms are located in northern parts of the state and have been relatively dry since March, leading coffee officials to predict that 1989/99 robusta production could fall roughly 30% below this season's output. The more favorable precipitation patterns in the state's southern areas (where most of the arabica is grown) have left officials more optimistic, regarding next season's arabica prospects.
An independent analyst, speaking at an international coffee conference sponsored by F.O. Licht, has projected Brazil's 1998/99 output at about 35 million bags. This size crop would be the country's largest since the 1987/88 harvest of 38 million bags. We view the newly released figure as potentially bearish for the market, although we believe that the September price weakness partly reflects Brazil's improved production prospects.
Another speaker at the conference, representing the Papua New Guinea Coffee Industry Corporation, projected the country's 1997/98 output at about 1 million bags, roughly 15% below initial forecasts. Parts of Papua New Guinea have experienced eight months of drought conditions, and there is concern that if El Nino-related dryness persists over the next three months, 1998/99 output could be seriously affected.
Citing “ideal” weather conditions, India's Coffee Board has projected a record crop of 241,000 tonnes for 1997/98 (October- September) versus 205,000 tonnes in 1996/97. Harvesting in the state of Karnataka (where about 70% of India's coffee is produced) will begin in late November. The other important coffee-producing state, Tamil Nadu, Is expected to open the coffee harvest in early November.
The New York area cash/futures differentials for prime washed coffee from Guatemala and for Brazil Santos 4 have eroded this year. Although the cash price for Guatemalan coffee, on average, held a 6-cent premium to futures in January, it was trading at an average discount of 1.3 cents in August. In the case of Santos 4 shipments, the average August discount of 28.61 cents compares with an average January discount of 0.27 cents.
December futures have been in a range of roughly $1.59-$1.71 since late September. We are maintaining our negative posture and expect any violation of the range's lower level to lead to a test of $1.55.
Arthur Stevenson
Added to the WWW 10-17-97
Last updated on 10-17-97
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com