Perking Along

22 December 2004



Coffee Prices Set to Rise Further

Starbucks, Folgers and that little shop on the corner all have one thing in common. The price of their basic commodity has been on the upswing of late. Coffee beans traded at the New York Board of Trade hit a four and a half year high when the Arabica contract for March delivery touched 107.40 cents per pound. Three years ago, the word glut applied. If analysts are right, 2005 may be the year to switch to tea.

At the heart of the matter is the iron law of economics – when demand outstrips supply, prices will rise. According to the International Coffee Organization, which keeps track of this sort of thing, demand in 2005-06 will be about 7 million bags (which weigh 60 kilograms, or around 132 pounds, each) higher than the expected supply of 106 to 108 million bags. These figures are in the range other analysts expect.

A year and a half ago, coffee prices were so depressed that this journal noted Rabobank in the Netherlands was trying to help out producers by letting them pay off their interest with coffee rather than currency, and Rabobank’s retail customers could pick up their interest in either Euros or coffee beans. Since then, Brazil has had some poor growing weather and has had a drop in fertilizer usage, while Vietnam, another significant producer, won’t have much of a crop this year either.

So, prices have bounced off their lows, and the speculators do as they always do. While providing liquidity to the market (a good thing), they exaggerate price movements (a bad one). Right now, a great many funds are very long coffee. For many of them, the calendar year and fiscal year end on the same day. That means they have just a few more trading sessions to book profits, so a correction is expected. Once they are out of the market, though, the supply short-fall will remain. And that means, a further increase after the drop.

Some experts believe that a repeat of the late 1990s, when growers went nuts over their beans and gave the world 31-year low prices by 2001, isn’t going to happen. Now, warehoused inventories are inadequate to meet the demand expected. And coffee plants don’t yield beans right away – it takes about 6 years from planting to the first useful beans. Meanwhile, the global tea crop in 2003 (the latest year for which data are available) was a record and increased demand was all that kept prices anywhere near stable. There is no reason, yet, to think 2004 will be an off-year for production.


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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