LONDON/NEW YORK: Brazil is tightening its grip on the global arabica coffee market as its beans surge into ICE Futures exchange warehouses for the first time, a move that could squeeze small producers out of the market and put pressure on benchmark prices.
The world's top grower has long been able to supply large volumes of affordable coffee for the mass market as mechanized harvesting and cheaper processing methods keep its production costs below those of its rivals. As its total coffee production rises, Brazil is boosting output of higher quality arabica and now, for the first time, is sending its excess beans to the New York futures market in significant volumes.
Data shows Brazilian coffee held in ICE warehouses and available for delivery against futures contracts has soared to 88,294 bags from 650 bags on Sept. 3, helping boost total stocks from recent 20-year lows of 1.1 million bags. The move poses a threat to rivals, mostly in South and Central America, as it could weigh further on benchmark ICE arabica futures, which fell to almost 14-year lows in 2019 and remain below many small growers' production costs.
ICE futures generally fall when the volume of stocks that back them rises, while the potential for futures traders to receive Brazilian coffee - less sought after than Central American beans - could also drive them down.
The Brazilian influx so far is probably just the tip of the iceberg. Traders expect up to 400,000 bags will be delivered in the coming months, the first major arrival since ICE amended its rules in 2013 to allow premium Brazilian "semi-washed" coffee to be delivered against its high-end "washed" arabica futures. In future years, even more could be delivered.
Washed coffee, which involves the fruit being stripped away using water before the beans are dried, costs more to produce and commands higher prices. Brazil produces mostly lower quality "naturals" where the cherries are dried before the bean is extracted, but a high quality coffee crop overall this year has allowed it to increase output of "semi-washed" beans, a process with fewer steps than fully washed but which still produces good quality coffee.
"If current market conditions were to arise again Brazil semis would (be delivered) again," said Vivek Verma, CEO of Olam Coffee, part of Olam, one of the world's largest agri-commodities traders.
Comments
Comments are closed.