Scope ‘limited’ for further falls in coffee prices

Investors should be wary of betting on further falls in coffee futures, even as they lurched lower again on Tuesday, the International Coffee Organization said, forecasting a 3.1% drop in world production.

The scale of the fall in coffee futures, which have dropped 16% in London on a front-contract basis and 23% in New York, reflects fund moves rather than fundamentals.

"These downward corrections seem to have been provoked by investment funds liquidating their positions in commodities in response to anxieties about the world economy," the ICO, an intergovernmental group, said.

Further declines "may be limited" by "tight" supplies of the beans, with stocks in exporting countries near historic lows and world consumption "buoyant" even amid growing fears for the global economy.

"Demand prospects for coffee continue to be promising, particularly given the growth of niche markets in traditional consuming countries and the arrival of new consumers in emerging markets."

First production forecast

The comments came even as futures continued their decline, with New York arabica coffee for December closed down 1.3% at 223.40 cents a pound in New York.

London robusta beans for November tumbled 3.1% to $1,891 a tonne.

However, ICO data implied that supplies would remain constrained, with the group, in its first detailed production estimate, seeing prospects for world output in 2011-12 as "somewhat mixed", pegging it at just under 129.5m tonnes.

Previously, it had pencilled in a figure of "around" 130m tonnes.

While the group has yet to reveal an estimate for global consumption this year, its data highlighted continued growth in use in developing countries, even during the recession, leading world demand 2.3% higher to 135.0m tonnes in calendar 2010.

‘Climatic problems’

The decrease in world harvest hopes for 2011-12 reflects in part an "off" season in the two-year cycle of higher and lower output in Brazil, the top coffee producing nation.

However, the ICO also highlighted an estimate of a 27% decline in output from Indonesia, which is not prone to this cycles.

"Climatic problems, particularly those related to the La Nina phenomenon, are responsible for this significant fall," the organisation said.

In Colombia too, "poor weather conditions caused mainly by La Nina are threatening to limit production to around 10m bags, affecting the recovery following three years of poor crops".

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