MAY 18, 2018–Dear Coffee Lovers, Arabica prices in the international market continue to trade at levels sharply below the cost of production and with active futures at the ICE exchange in New York recently trading even BELOW the $1.20 per pound mark, there is ZERO reason to believe that small holder coffee growers around the world are able to provide much work, if any, that will be able to prevent another outbreak of the rust pest. As we speak, most countries across Latin America have made relatively decent efforts to contain the rust crisis that first started in mid-2012 but most of these same countries also continue to report new attacks both in farms and substantial areas of growing areas that have still NOT recovered from the last outbreak. Sure, we are not at the point or magnitude we were five years ago at the height of the crisis, but the market should be cautious not to forget that it does not take very much with such an extended period of low prices to push production capacity below the level where rust takes over. We are therefore re-publishing our report from the rust crisis and CALLING UPON all in the industry to take the issue of low prices serious.
World Arabica coffee prices are trading near the lowest levels in five years and there seems to be nothing to stop the bearish sentiment the market dominating trade these days. Producers, especially in Central America, are puzzled as to the low prices. How, they ask, is it that prices remain so low when the production crisis from the ongoing rust epidemic continues to severely impact output from the region? And are market comments suggesting a situation of massive over supply really a correct indicator for what rules the trend setters in the coffee trade? As the world has embarked on the 2013-14 coffee harvest, the projections and forecasts for the new crop couldn’t be further apart and once again, uncertainty looms high over the trade. A special report by SpillingTheBeans for the November 2013 edition of the Global Coffee Review.
BY MAJA WALLENGREN
Coffee forecasting is a tricky business and there is no indication this is about to change. Since the global coffee trade entered the full force of the free market when the Cold War finished between 1989 and 1991and put an abrupt end to the export quota agreements and minimum prices coffee forecasting has been a concept increasingly based on subjectivity.
Add a major weather crisis like the ongoing rust disaster in Central America and most Arabica-producing countries in Latin America and the Caribbean, and the only outcome that is certain is that uncertainty will be the name of the game in the year ahead.
Harvesting of the new 2013-14 crop is starting in earnest across Central America this month and from traders to producer associations, from exporters to analysts, there couldn’t be more disagreement as to how severely the damage from the rust fungus is affecting output. From the most conservative of the figures, the London-based Man Group Plc’s coffee trading arm Volcafe/ED&F Man has pegged output to reach as little as 10.7 million 60-kilogram bags. At the same time, the U.S. Department of Agriculture, USDA, has projected output from Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua to reach 12.61 million bags, leaving a staggering difference of some 2 million bags alone for a region of just five producing nations.
“Central America and Mexico account for one-fifth of the world’s Arabica production. The region’s production is forecast to decline 1.4 million bags … due to lower yields from coffee rust,” said the USDA in its first 2013-14 world coffee market outlook.
“Rust-affected mild crops in Central America and in Peru are still a real concern. The 2013-14 crop is more severely affected and we see output falling a further 2.5 mio bags to 10.7 mio bags region,” said Volcafe in its quarterly report.
A difference in up to 20 percent for the forecasts for output out of a region as Central America is considered “very large compared to the fact that in any given crop cycle we are talking about a maximum of 25 percent of the production seen in Brazil,” said one green coffee trader in the New York physicals market. “The fact that there can be such a big difference goes to show the extend of uncertainty that still wraps the Central American rust situation and that we still could face quite a few more shocks on that side as far as supply-upsets is concerned,” he said.
So with this much uncertainty, what do we know about the latest situation? When news of the severity of the outbreak first started to reach the market last January, damage estimates varied from the projections by trade, analysts and producers of losses between 20 to 30 percent in the now completed 2012-13 harvest. All sources agreed that damage would be worse in the new 2013-14 cycle as the losses would add between 20 to 40 percent on top of last crop’s losses.
The biggest disagreement is seen in the case of Honduras and Guatemala, with up to 1.0 million bags in difference in Honduras. Honduras has in the last two crop years been Central America’s biggest grower with total production reaching a record 5.9 million bags in the 2011-12 cycle thanks to extensive replanting and renovation programs, in addition to significant new plantings. While the USDA has said it expects Honduran production to be able to rebound 9 percent to 5.0 million bags Volcafe, on the other hand, has said it expect Honduras to produce no more than 4.0 million bags. The government-run Honduran Coffee Institute, Ihcafe, meanwhile says it expects the new harvest to yield 4.6 million bags, adding that rust had also caused damage to some new areas which that prior to the outbreak of rust had been projected to enter production this year.
“The disease has lowered crop yields, cost jobs, lowered incomes and damaged plantations, negatively affecting the 2013-14 harvest. The job losses are reflected throughout the coffee supply chain, from harvesting to exportation, especially in the populations that live in Honduras’ coffee areas,” said Jaime Salazar, institutional advancement director at the Zamorano University in Honduras, which has advised Ihcafe on poverty eradication strategies in coffee dependent areas. “This will lead to lower purchasing power, deepening poverty, negative environmental effects of deforestation caused by the abandonment of farms and more migration to other countries,” said Salazar.
Disagreement about the level of impact is also high in Guatemala, the region’s second largest producer and leading exporter for most of the last decade. While the forecasts again vary a great deal – from Volcafe’s low of 2.8 million bags to USDA’s high of 3.9 million bags – no one is denying that there has been significant impact of rust. But regarded as one of the keys to explain why the market has not to any greater extend reacted to the rust crisis, Guatemalan coffee officials as well as traders acknowledge that large stocks that were left from the 2011-12 bumper crop of close to 3.9 million bags were not shipped until after the start of the 2012-13 cycle, hence softening the impact shown in export figures.
As global coffee prices have fallen to the lowest levels in over 4 and a half years producers across Latin America are getting increasingly desperate. The answer to the market’s lack of response is found in bigger crops from Brazil and Colombia. In Colombia recovery is finally coming along. After over four years of consecutive smaller crops the new 2013-14 Colombian harvest is seen approaching double-digit figures for the first time since the 2007-08 cycle. In Brazil, meanwhile, the country’s producers are picking the biggest off-record crop in history.
Back to Brazil, one of the traders that in recent years have been regarded a “bear” when it comes to being among the most optimistic in regard to expectations of big and abundant crops, Santos-based green coffee buyers and exporters Comexim has recently made a stunning withdrawal from previous positive projections.
“The reason for the overall bearish sentiment is the fact that most Brazilian warehouses are reported with high stocks and this, combined with relatively friendly weather for the next harvest so far does not exactly stimulate our producers to continue investments in the fields, but this and low prices are impacting the production level and will definitely claim consequences,” Wolthers said in an interview.
The overall conflict over the outlook for supply in the medium term begs the question, what exactly can industry stake holders from roasters …
For the rest of the article and other coffee news, please see the Global Coffee Review online edition at: https://globalcoffeereview.com/economics/view/coffee-leaf-rust-and-sliding-coffee-prices