Colombia’s storm in its coffee cup is not abating; despite an expected increase in production this season, rival Latin American coffee growers have muscled in pushing prices down.
Colombian output is expected to be roughly nine million bags this season, which is a one million bag recovery against last season but nowhere near the 12 million bags seen four years ago before the crash, which brought Colombia to a 40-year production low.
The country’s problems stem from the past four seasons as the difficult La Niña weather system, disease, and a replanting program hit production levels. While these conditions have now ceased to be a problem, the lack of earnings for the coffee farmers during that period limited the coffee-growers’ ability to invest in fertilizers to improve yields.
Colombia’s troubles opened the way for Central and South American countries that quickly moved to fill the gap. While Colombia was dealing with La Niña along with its other problems, the Latin American countries were reaping in the good prices pushed up by Colombia’s devastated crop. This allowed the rival growers to invest in better farming practices resulting in improved quality and quantity of beans.
In the four years between 2007 and 2011 Peru has steamed ahead and increased output of top quality coffee by 80%. While this is still just 5.4 million bags, if the trend is maintained Colombia will be in big trouble. In the same period Honduras increased production by 18% to 4.5 million bags and Mexico by a massive 40% to four million bags.
Brazil, while always harvesting a massive crop, traditionally produces poor quality beans. More investment in farming practices and the planting of new trees however, has improved the quality of the coffee increasing Brazil’s importance in the export market and putting it in competition with Colombia.
Dutch financial services provider Rabobank warned that there could be a risk of oversupply in the long term and indicated that there would be lower international arabica coffee bean prices due to Brazil’s increasing output, according to Agrimoney news site.
Overall coffee’s futures price has dropped more than 20% this year as stockpiles in warehouses monitored by ICE Futures, which trades on future commodities, surpassed two million bags in September, the highest in more than two years according to Bloomberg news. The sales would usually be much more advanced at this time of year but the traders are waiting for higher prices that haven’t come.
Friday arabica prices for December on ICE fell by over 3% according to the Business Recorder which was the biggest drop since July. The price drop was affected by arbitrage selling which takes advantage of the price difference between the New York and London markets.
Brazil still has more than half of its crop stockpiled which will likely force prices down further when it begins to sell. Part of the Brazilian crop was damaged by rain and so the owners of the good quality beans are holding back the higher grade beans and waiting for higher prices which they so far have not seen.
On top of this coffee stockpiling the demand for arabica beans is dropping while there is more demand for cheaper robusta coffee. Robusta now constitutes 46% of all coffee consumption.
Last year the problems in Colombia caused a 14-year high in prices allowing producers to slow sales. But this year coffee prices have barely responded to Colombia’s supply problems, reflecting that Latin American coffee-growers are filling the gap.