Colombia woes could fuel ‘sharp’ coffee price rise

Hopes of a revival in Colombia’s coffee output may be misplaced, with the country looking increasingly likely to post a decline in output – potentially paving the way for prices to "advance sharply".

The tail-off in 2010-11 production in Colombia, the world’s second-ranked producer of arabica beans, from a bright start looks set to extend into August and September data, the last months of the marketing year, veteran analyst Judith Ganes-Chase said.

"Colombia’s main crop production, from October to March, had shown a respectable improvement from last year’s disaster," Ms Ganes-Chase, head of J Ganes Consulting, said.

"But the secondary harvest or Mitaca, has been sharply reduced because of heavy rains during the flowering period which knocked the blossoms from the trees prematurely."

‘Another supply crunch’

Output looks set to end 2010-11 at less than 8.5m bags, below last year’s 8.66m bags, on ABN Amro data, and dashing hopes that Colombia was staging a recovery towards historical production levels of some 12m bags, after successive seasons when production has been dented by poor weather.

The US Department of Agriculture in its latest estimate, in June, pegged the 2010-11 crop at 9.5m bags.

The shortfall "will tighten up availability and force buyers to have to turn to other origins" at a time when inventories in other producing countries have been run down by soaring exports.

"The market is potentially facing another supply crunch of better grades of washed arabica coffee," Ms Ganes-Chase said.

"If [Colombia’s] heavy April rains had an adverse effect on the 2011-12 main crop, then the market would have strong justification for advancing sharply."

Seasonal rebound?

The comments came as arabica coffee futures, which are traded in New York, continued a revival from 2011 low, for a near-term contract, of 231.35 cents a pound hit last week.

Besides the recovery in broader financial market sentiment, the revival has been spurred by continued fears over damage to coffee trees from cold weather in Brazil, the top coffee producer.

Prospects of a recovery in prices have been further boosted by seasonal factors.

"The market typically makes a seasonal low at this time of year under the weight of the Brazilian crop, and then starts to advance as roasters return to the market to purchase coffee ahead of the winter drinking season," Ms Ganes-Chase said.

Furthermore, regulatory data shows that coffee is one of the few crops in which speculators already hold more short positions, which gain when prices fall, rather than long bets – meaning they may be reluctant to sell down further.

Colombian woes

The latest Colombia coffee data, last week, showed output in July at 530,000 bags, falling, year on year, for a fourth successive month.

So car in calendar 2011, production has reached 4.6m bags, some 200,000 bags behind the same period in 2010.

Nonetheless, Luis Genaro Munoz, the head of Colombia’s coffee growers’ federation, said he was confident that the country would meet a target of 9m bags in output in 2011, beating 2010’s 8.9m bags.

Besides poor weather, Colombia’s output is under pressure from a replanting programme which has raised the proportion of immature trees, and an outbreak of the roya fungus which attacks coffee plant leaves, impedes photosynthesis and so lowers productivity.

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