Drought and frost could disrupt global coffee production and send prices to new highs, raising the prospect that the traditional cup of java on American breakfast tables may cost more soon.
"If there is a big frost, any major disruption in terms of drought, anything like this, we could see the market trading at levels that nobody has ever seen," said Rodrigo Costa, vice-president of institutional sales for Fimat USA in New York.
Roasters who market and sell coffee in retail and department stores normally raise their prices when bean values rally significantly in futures markets. US roasters took that step due to high arabica futures prices in January and robusta prices last October.
Arabica coffee beans are used primarily in brewed coffees while robusta is mainly used to make soluble coffee. "We'll go to all-time highs if there's any sort of supply disruption. There's just no containing it because you have the situation where stocks at origin are still very low," said Judy Ganes-Chase of commodity firm J. Ganes Consulting.
London robusta futures, underpinned by tight supplies, have been trading at nine-year highs. US arabica futures hit a 7-1/2-month low on May 1 but then climbed 17 percent over the next five weeks amid concerns about a possible frost in Brazil. While a frost in the world's top coffee producer, Brazil, could damage the 2007/08 crop's quality, any major disruption will tip the scales for a greater deficit of the 2008/09 crop year, analysts said.
"It would throw this market up for grabs," said Steve Platt, analyst for Archer Financial Services in Chicago. Platt and Costa projected a disruption could cause arabica coffee futures trading on the New York Board of Trade to reach at least $3 per lb, or even higher. In 1976, what Platt called a "big freeze" caused arabica coffee to surge, eventually peaking at nearly $3.40/lb in 1977. This is sharply higher than $1.1540/lb, where the July arabica coffee futures contract settled on Monday.
"The stocks are tight. If you get any problems, certainly we could see a repetition of '76," Platt said. The industry, however, may not be able to recover quickly as it is becoming more difficult to attract the labour necessary to replant crops.
World coffee production estimates for the 2007/08 crop year vary with the US Agriculture Department projecting 118.9 million 60-kg bags, down 12.5 million bags from the previous crop year.
The International Coffee Organisation (ICO) expects this figure to come in at 112 million bags with global coffee demand to continue to rise 1.5 to 2.0 percent a year in the near term. The ICO pegged 2006 world consumption at around 118 million bags.
The USDA attributed the reduction to lower yields in Brazil, where coffee trees will be in the biennial cycle's off-year, and projected world end stocks will drop to 16.8 million bags, the lowest level since the USDA began keeping records in 1960/61. Analysts disagree on where coffee will go in the near term, a traditionally weak season for coffee.
"From now until August, beginning of September, is the window that we have to see prices going higher," Costa said, adding that focus will then turn to the 2008/09 crop.
Ganes-Chase, however, expects the seasonal trend will cause prices to fall within the next two months, although she projects this will be shallow. "The market still seems to be well-supported," Platt said.