Arabica coffee futures have potential for gains of 15%, or more, boosted by production downturns in Central America as well as in Brazil, where a dip in quality as well as the quantity of the crop will come into play.
Marex Spectron coffee analyst Stephen Pollard said that, while New York-traded arabica coffee futures in April and May dipped below 90 cents a pound, reaching their lowest since 2015 on a spot basis, this had taken them below production costs for many growers.
This includes Central American farmers, whose high-quality washed arabica beans, while attracting a premium of some 30-35 cent a pound, are relatively costly to produce.
The revival in values back above 100 cent a pound had taken them back to a level where Central American growers are “just about making money”.
However, the “sustainable price” of coffee was some 120-130 cents a pound.
“I do not see why the price should not get there in the coming year,” Mr Pollard said.
Quality as well as quantity
The comments came as Marex forecast a drop in world coffee production of 6.7m bags, to 166.2m bags, in 2019-20, reflecting largely a drop of 6.0m bags to 58.5m bags in output in top grower Brazil.
While the “long-term trend is very much for production increases in Brazil”, where yield increases have allowed farmers to depress their output costs, 2019 brings an “off” year in the country’s cycle of alternate higher and lower arabica harvests.
Signally for arabica prices, Mr Pollard said that “this year, that Brazil arabica production is not only going to be much smaller but of lower quality” than last year.
This will see it compete with lower quality coffees, including London-traded robusta beans, rather than the high-end supplies, including Central America washed arabica coffee, that Brazil’s 2018 harvest did.
Indeed, the strong quality of Brazil’s arabica harvest last year, besides its record volume, had been a particular pressure on New York prices.
He added that the weak arabica prices had been “doing what low prices should do, which is to choke off marginal supply”, as evident in weaker output prospects for many other countries.
The Honduran crop, a proxy for Central America, was forecast falling by 600,000 bags to 7.0m bags this year, with potential for a downgrade to this estimate.
“Because prices have been so lower, farmers have not been fertilizing plantations, husbandry has not been so good,” Mr Pollard said.
“They are not taking care of the plantations the way they should.”
Furthermore, there was the “human tragedy” evident in the flow from the likes of Nicaragua and Honduras of migrants, many of whom were coffee workers, and meaning labour was now in many cases “simply not there”.