DJ OUTLOOK 05: Nybot Coffee To Strengthen In Coming Yr
By Susan Buchanan
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Arabica coffee futures have further room on the upside
in 2005 after the market sped to four-and-one-half year highs on the New York
Board of Trade in December, traders and industry members said, as supply from
major producers is expected to be lower.
Many market participants who were initially surprised by a vigorous rally in
late 2004, which sent the nearby contract over $1 a pound, have since raised
their price targets considerably, with some suggesting nearby futures could
move significantly beyond that level.
Brazil's developing 2005-06 crop, harvested from next May to September, could
be the smallest in years, industry members said. Meanwhile, roasters in the
U.S. and Europe are scrambling to find quality supplies after growers in
Colombia, Central America and Brazil paid little attention to groves during a
long period of low prices in the early 1990s.
"The Nybot market will be firm in the first quarter of 2005 and will likely
be trading above the $1.00-a-pound mark," said Rodrigo Costa, broker with Fimat
USA in New York. "Prices could turn very volatile in the second quarter,
heading into Brazil's winter (June to August). Brazil's new crop is already
expected to be smaller than last year because of the tree cycle, and any
additional problems like frost or drought will lift the market. A killer frost
in Brazil is less likely than it was 10 years ago, (after groves were moved to
milder areas to the north) but frost can still occur."
Brazil's 2005-06 crop is seen at a moderate 30.7 million to 33.1 million
bags, below 38.6 million the previous year, because of the biennial production
pattern and other factors, according to the Ministry of Agriculture. Low use of
fertilizer, insecticides and labor, along with a lack of investment in groves
in past years, has taken its toll.
Brazilian private consultants Safras e Mercado recently forecast Brazil's new
crop at 32.9 million to 35.2 million bags.
Consumption is growing rapidly in Brazil in the meantime, and could reach 16
million bags in 2005-06, leaving less for export, the Brazilian Coffee Industry
Association estimates.
Brazil has held a 25% to 30% share of the world coffee market in recent years
but that could decline in 2005, Costa said.
World Stocks To Shrink In 2005
The supply and demand balance will be tight in Brazil and worldwide in 2005,
and a drawdown in global stocks of at least 5 million bags is expected, Costa
said.
The International Coffee Organization sees 2005-06 world production at 106
million to 108 million bags, below the previous season and below consumption,
according to a mid-December forecast. World 2004-05 output was put at 114
million bags, equal to consumption. Asian tea drinkers are increasingly turning
to coffee and growth in the region's demand is offsetting stagnation in the
U.S. and Europe.
Vietnam's 2004-05 crop should be down 30% after drought and floods, the
Vietnam Coffee and Cocoa Association predicted in November.
Any meaningful disruption to coffee supplies in 2005 could cause the Nybot
market to rally, "possibly to levels never seen before," Costa said. The recent
high for the Nybot spot month was $3.18 in 1997 and the market was even
stronger in 1977.
Meanwhile, "U.S. roasters have room to buy futures after they hiked list
prices in December," Costa said.
Folgers was the first major roaster to raise prices in December, by 14%,
followed by Maxwell House and Sara Lee with similar hikes. European giant
Nestle has yet to announce increases. Starbucks Coffee lifted retail prices in
its stores by 4% to 5% in October.
U.S. monthly stocks, as tracked by the Green Coffee Association, and
inventories held in Nybot-licensed warehouses declined in fall 2004 from very
high levels, as roasters removed beans to meet peak winter demand.
Traders said it's quite possible that Nybot in 2005 will approve Brazilian
washed arabicas for delivery, after the exchange collected industry comments
and conducted grading tests in 2004.
"If Brazilian washed coffee meets exchange qualifications, Nybot may go ahead
and allow it for delivery," a desk trader in New York said.
Such a move "has opposition from some of the other origins and some of the
roasters, but would provide a needed reference point for Brazilian washed
coffee," he said. Brazil produces about 3 million bags of semi-washed coffee
and one million bags of fully washed coffee annually, he said.
Fully washed coffee has had gummy substances removed in a fermentation tank,
while semi-washed beans are washed, but not put into a fermentation tank, and
set out to dry.
Some traders worry that making Brazilian beans, which have traditionally been
of lower quality that Colombian and Central American coffee, will cheapen the
board. Furthermore, some U.S. specialty roasters don't want to be stuck taking
delivery of Brazilian coffee against Nybot futures.
Funds Pile Into Market
The futures market has begun to settle well above $1.00 in the front month,
as funds have been active participants, said Hernando de la Roche, coffee head
at Hencorp Futures in Miami. Nybot prices will be firm in the first quarter of
the year, he predicted, with a lot of volatility in the first half of 2005.
"Portfolio managers have been migrating money from a lackluster stock market
into commodity funds, with coffee being particularly attractive because of its
high per-tick value and recently large trading ranges," said Paul Adler, trader
with ADM Investor Services In New York. A minimum move of 5 points in Nybot
coffee futures is worth $18.75 a lot, he observed. "The bang for the buck has
traditionally been high in coffee, and there's the potential for large profits,
but also large losses."
Fund participation in the Nybot coffee market is growing as a result.
Funds, or large speculators, have a record long position on Nybot in late
December, according to the Commodity Futures Trading Commission and commercials
-- the industry and the trade -- have a record short position. Open interest is
high and approaching an all-time high set in spring 2004.
"We're hearing targets of $1.17, $1.20, $1.45 and higher for the nearby
contract," said Jared Siegel, head of A&A coffee, a Nybot floor brokerage.
