For investors: will coffee grow in price?

Market Leader informed

In the near-term perspective the pieces on coffee will depend on the problems affecting the production volume (low reserves, unfavorable weather conditions and sick coffee plants) in numerous coffee-exporting countries around the world (for details read the article “Coffee market: perspectives for investors”).  Consequently, the coffee prices are expected to see further growth, showing a delicate balance of supply and demand.

The average monthly value of the ICO Composite indicator price grew from $184,26 per pound in December 2010 up to $197,35 per pound in January 2011 (a 7.1% increase). The ICO Composite indicator price is equal to the arithmetic mean value of the daily prices for some specific kinds of coffee (like Mild Arabicas and Robusta), calculated in accordance with the export share of each type determined by the ICO (the calculations are based on the values shown by the coffee markets of the US, France and Germany). The current value is the highest since September 1994. The index value has already gained 55% as compared to the value seen in January 2010. Moreover all the 4 kinds of coffee (Colombian Milds, Other Milds, Brazillan Naturals, Robustas) have seen their prices growing. The given statistics confirm the bullish tendency at the global market of coffee.

Such a sudden tendency change was caused by a shift towards demand at the market of coffee. The global reserves of coffee are running low while the exports are growing. For example, in December 2010 the export volume gained 32% as compared with 2009. There reason was the increased demand for different kinds of Arabica, which instantly affected the market - the price on the Kenyan coffee of premium quality grew up to $ 20,440 per ton. Over the last 2 months the export volume of the Arabica traded at NYMEX has increased by 40%. During the last quarter of 2010 (Oct-Dec) the export from Brazil reached the record-breaking level of more than 10M bushels against 8M in Q4 2009.

The net export in 2010 increased by 1,4% (or 97.4M bushels). Jose Sette, CEO of the ICO, says that it would be possible to expect an increase in the supplies, taking into account that 2010 was a highly productive year in Brazil in terms of coffee crop (the Brazilian export increased by 8.8% in 2010). The export surge is still conditioned by the growing consumption of coffee around the world.

It is unlikely that in the 2011/2012 agricultural year such high export volumes will be maintained. There are 2 major reasons for that:

1.       This year’s crop is expected to be poor. Brazil is expected to harvest 41,9 -44,7M bushels of coffee in 2011.

2.       The global reserves of coffee are rather low.  The reserves of the exporting countries are unlikely to exceed 13M bushels in the 2010/11 agricultural year. The reserves of the importing countries are believed to make up 19M bushels. The levels of the certified coffee reserves at the stock exchanges in London and New York are given in the table below:

 

 

As we can see, the coffee reserves decline every month, which makes the prices grow . On Thursday, Feb 10^th, the price updated its 13-year high once again, reaching 255,05. The low volume of global production and reserves remains to be the main reason for the upward tendency seen at the market of coffee. Taking into account the fundamental data, we expect the price to head for new heights - 260 and higher – on condition that the price settles above 255. Technically, there are no signs of weakness.

 

 

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