Comment, 2 September, Jos Algra
The Roller Coaster
Starting a record harvest in Brazil and a world production 2010/11 of 135-139 million bags, against a consumption of 130, in June a price rally was triggered that took the highest level in 13 years. It collapsed a few days (long time not seen a drop of 15 cts in 1 day) and then it took off again. The target is 200+ and the floor is 155 (the roof until June), and in the middle everything is possible. There is a concern regarding the stocks and the harvest, but don’t forget that it’s speculation that has taken the prices to these levels.
Consumer stocks have fallen more than 7 million bags and continue dropping, but they are expected to increase this harvest. The ICO announced that the consumption dropped for the first time in many years (to 128.8 millions) and the stocks will recover, but the market is already focusing on the harvest of 2011/2012. How much will production fall?
¿To fix or not to fix?
Watch your producers first. 180-190 is a good price, but nothing compared to 1997, when the market caught the industry without stock and surpassed the 300. It is expected that if NY reaches 200, it won’t be for long, but if it happens and you already fixed, are the members going to deliver or can you take the loss? On the other side, if it gets back to 155, you are going to be in disadvantage against competitors who already fixed contracts. If you have sufficient volume you can fix a part now (no more than 10-30%), fixing the rest back to back as the coffee gets in and average your prices. Be careful with fixed-price contracts, a good price today can be a problem tomorrow, unless it is well above the market price (who sells at 230-250?).
Be careful as well with the differentials and the local prices. We have had 2 harvests starting with low differentials that later on soared, due to the shortage of washed Arabica, above all the top qualities. Given the short term shortage there are good premiums for early shipments, but for the coming harvest differentials have dropped. Keep an eye on the weather and harvest forecasts, above all a reduction in Colombia can trigger a new rally on the differentials. If you need contracts as collateral for financing, sell what is needed, but leave the rest to see how the differentials and market prices develop. Better sell the rest mid harvest than default on the contracts.
From el Niño to la Niña, the news continues reporting excessive rainfall (in the midsummer heat!) in Colombia (coffee trees affected by fungus, 3rd consecutive year of low harvest?), Central America (the strongest rains in 50 years), Vietnam and a possible drought in Brazil (where the flowering season is initiating). Excessive rains in the region have affected food production, drought and fires in Russia, flooding in Pakistan, the world food stock at its lowest level of the last 50 years; food will be expensive, many people will suffer from famine and that will influence the coffee prices.