South-American Coffee Market Experiences Intensified Competition

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on Sep 21, 2012

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South-American Coffee Market Experiences Intensified Competition

The coffee market has long been jittery in the face of bad weather news coming from Columbia, especially when the La Nina phenomenon last year pushed arabica coffee prices to their 34-year peak of $3.089 per pound. According to the Financial Times however, arabica coffee has been the worst-performing agricultural commodity this year with prices having plunged by more than 20 percent since January.

In 2012 the Columbian crop has once again suffered from heavy rains but the coffee market remains unimpressed with no current threat of shortages. Not only has Brazil, the largest coffee producer in the world, bumped up its harvest but other South American countries have also moved in to fill the gap. The strengthening of the smaller producers has mainly come mainly from the price rally experienced over the past few years – the rise in profit margins allowed for better husbandry of the plants and increased investment in equipment and acreage. Peru managed to increase productivity and consequentially saw a 25 percent jump in exports in the five months up to February 2012. For the same period Honduras and Mexico also registered export increases of respectively 22 and 40 percent.

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The advances made by the non-Colombian South American coffee producers have triggered curious structural changes in the coffee market. Due to its rapid production increase, Peru is now exporting substantial amounts of Arabica coffee to Colombia. Brazil’s industry, favoured by specialty brewers such as Starbucks Corp. (NASDAQ:SBUX), is enjoying an influx of buyers attracted by its higher quality arabica beans.

Plagued by bad weather, Colombia’s output has dramatically fallen from the 12.5 million 60kg bags in 2007 to 7.8 million in 2011. Bloomberg reported that this year Colombia’s National Federation of Coffee Growers has forecast an increase in its production by 8.8 percent and a harvest of 700,000 bags more compared to 2011. According to Agriculture Minister Juan Camilo Restrepo, in the next few years there is a real possibility for the country to surpass a 12 million bags annual production if the weather is favourable.
The arabica coffee price is currently at $1.70 per pound and according to Radobank, it is “the most undervalued” from the soft commodities index. “We anticipate prices to be rangebound to October, between 170-185 cents a pound,” noted the bank.