If the jump of more than 60% in arabica coffee prices so far
this year seems extreme, well, you ain't seen nothing yet.
At least, so says Judith Ganes-Chase, a long-time soft
commodities analyst who warns that however bad Brazil's harvest prospects for
this harvest may look, 2015's are even worse.
"It is a definite" that coffee output from Brazil, the world's
top producing country, will fall again next year, she says.
"There is no way for coffee trees to make up for growth"
that they have lost to the drought in Brazil's coffee belt earlier this year.
The impact on prices will be to send them above 300 cents a
pound, meaning a tripling so in values from their levels at the start of the
year, and implying further upside of more than 60% for patient investors – or roasters
slow to hedge their coverage.
"You would certainly think so. And the sooner it comes, the
healthier it will be for the market, as it will allow roasters to ration
supplies, and farmers to make adjustments to increase the quality and quantity
"Higher price now will avoid a panic situation setting in
Her level of anxiety over coffee supplies contrasts with the
healthy estimates that many analysts have for the level of world inventories of
the bean heading into Brazil's drought, so in theory cushioning the impact of crop
The US Department of Agriculture estimates world coffee
stocks at the close of 2013-14 at 36.3m bags.
Macquarie has forecast stocks at well above 60m bags.
And at the 9.3m bags at which the USDA staff in Brasilia
estimates Brazil's stocks alone, the highest in nine years, there would appear
to be plenty of coffee to spare to make up for drought damage.
Not so fast, says Ms Ganes-Chase.
"Just because there are so many bags of coffee, does not
mean there is adequate supply."
Assuming flat Brazilian exports in 2014-15, at some 32-33m
tonnes, and domestic consumption of 20m-21m tonnes, the country looks like
eating deep into these inventories, if the USDA's production estimate of 49.5m
bags for this year is right.
(There are many estimates lower than that - Brazil's Conab
bureau is expected to reveal one of them later on Thursday - although Ms Ganes-Chase
cautions against mixing numbers from different commentators, who may use
varying assumptions and crop years.)
The numbers imply a drop to 6m bags in Brazil's inventories,
which may not prove itself the cushion it appears for foreign importers, given
that stocks often comprise lower quality beans.
"About 20% of Brazil's crop is not of export quality anyway,
so assuming that is represented in the stocks, that is 1.8m bags."
And of the rest of inventories, "what is left is usually the
coffee that producers could not sell," she told Agrimoney.com.
"People buying are expecting a certain level of coffee
quality – they are not going to get it."
Fate already sealed
And this is before getting into 2015-16 production prospects.
The reason the harvest will fall next year - however much
rain falls, or fertilizer farmers apply – is that the tree growth needed to
bear the flowers this year, for the cherries next year, has already been severely
Instead of 12-15 flower-bearing nodes that trees would
typically have grown during the first three months of the year, they have grown
6-9 nodes, Ms Ganes-Chase says.
"It is too late now for any more growth - we are heading
into the Brazilian winter. And that means that however perfect the weather is
from now on, the damage is done.
"The crop has that much less potential."
Size is important
So Brazil's stocks would appear, on paper, to be heading for
a further decline of at least a further 3m bags, from inventories whose quality
will likely be worsened by the removal this season of the better supplies, with
replacement from a 2014 crop which looks likely to struggle on taste as well as
"Beans or malformed or a lot lighter than usual, if they are
there in the cherries at all.
"From what we are hearing, it is taking instead of about 600
beans to make a [60kg] bag, it is taking 1,100, which means the quality of that
coffee will be pretty bad."
The maths suggest that Brazil's coffee inventories look like
heading towards the 3m-bag mark which alarmed markets three years ago, sending New
York coffee futures above 300 cents a pound.
Still, Brazil may be the largest coffee producer, but it is
not the only one. Can't supplies in other countries fill the void?
"There is not that much stuff out there to make up for
Brazil's shortfall," Ms Ganes-Chase says.
While Vietnam, the second-ranked coffee producer, did have a
large harvest this year, its extra supplies have been offset by poor production
And as for the recovery in Colombia, the second-bigger
grower of arabica beans, she flagged a decline in production last month, the
first year-on-year drop since 2012, which has raised questions over the country's
ability to maintain its output recovery.
"This is a multi-year problem," she says.
And one of historic proportions too.
"In all my 30 years of covering commodities, I have not seen
anything like this before."