The International Coffee Organization raised doubts over a
revival in the premium of arabica coffee over robusta beans, as it cautioned
that the weak market had cut prices below the cost of production.
The intergovernmental group acknowledged some recovery in
the arabica premium last month, by 1.7%, from April levels which at one point
fell below 40 cents a pound – less than half the gap a year before.
The small revival has been attributed to improved prospects
for coffee crops in Vietnam, the top producer of robusta coffee which, in generally
being considered of lower quality than arabica, trades anyway at a discount.
However, the ICO, flagging that the "the structure of the market has changed significantly",
cautioned that the arabica premium would struggle to make much more headway, echoing
comments on Monday from Macquarie.
Arabica prices faced pressure from "the new reality of a greatly
diminished on-off cycle in Brazil", the top producing country, which is seeing
a reduction in the swings it sees between alternate higher and lower harvest
"The possibility of increased carry‐over stocks, is
resulting in a more constant availability of arabicas year on year," the ICO
"Parallel to this is the sustained appetite for robustas,"
evident in a "negligible increase" in certified stocks held for delivery against
London futures "despite the strong levels of shipments coming from Vietnam".
The ICO attributed the rise in demand for robusta from the growth
in demand for coffee in emerging markets, which prefer the soluble coffee
typically high in robusta content.
"Given these developments, the current range for the arabica/
robusta arbitrage could be expected to continue in the short‐term."
Production costs rise
The comments came as the group cautioned that the decline in
coffee prices - which have more than halved over the past two years for New
York-traded arabica futures - was causing financial hardship among producers.
Although world arabica exports have remained stable at
8m-10m bags a month over the past two years, revenues from this trade has
slumped from more than $2bn to about $1.5bn.
Meanwhile, "the cost of production has been rising
in many exporting countries" particularly in Colombia – which this year witnessed
demonstrations by producers over low prices - where they have soared nearly
150% since 2004.
"There is concern that many producers may be selling at a
price which is not remunerative compared to the cost of production.
"Whether the price paid to coffee growers has dropped below the
cost of production will vary from country to country, but the trend appears to be
heading in that direction."