Just as we are slowly climbing out of last year’s extreme pinch in coffee prices, some potentially unhappy news comes out of Colombia. Apparently, a rust is infecting many coffee plants and causing some supply worries. Will this keep commodity prices, and the price for a cup of our favorite morning drink high, or will this just be a blip in the global ebb and flow of coffee production? We shall find out as new crops come in and we see how Brazilian and Vietnamese production affects the market. Here is a bit of news from Dow and the WSJ.
NARIÃ‘O, Colombiaâ€”On the steep and verdant slopes here, an orange-colored fungus is laying waste to hundreds of thousands of acres of coffee. The infestation, and efforts to eradicate it, raises the specter of higher coffee futuresâ€”and more expensive cups of espressoâ€”for months to come.
The fungus is known as roya, the Spanish word for “coffee rust.” It grows on the leaves of a coffee plant and chokes off nutrients to the beans. Encouraged by years of torrential rains, roya has spread throughout Colombia, forcing farmers to pull out their plants and replace them with fungus-resistant seedlings.
Juan MarÃa CaÃ±ar, a 64-year-old farmer in the NariÃ±o region in southwest Colombia, said he was forced to replant much of his acreage. He usually produces 1,500 kilograms (3,300 pounds) of coffee beans. “This season, I’ll have about half that,” he said.
The fungus has ruined what was supposed to be a good year for Colombia, the world’s second-largest producer of high-quality arabica coffee, the mild-flavored, hand-picked beans for which coffee traders usually pay a premium. As much as 10% of the country’s coffee-growing region, or about 300,000 acres, were replanted this year in a bid to get rid of the scourge. New plants typically take as long as three years before they produce their beans. This is likely to restrict supplies, sending prices higher.
Investors have been paying scant attention to the potential crisis. Futures for arabica coffee, the variety most commonly brewed in the world, have been falling along with other commodities, amid gloomy headlines out of Europe. However, the declines are smaller than those for other exotic agricultural commodities. Coffee prices have fallen 7.4% this year, while cotton has dropped 40%, and cocoa is down 28%. On Tuesday, coffee for March delivery settled 1.5% higher, at $2.2280 per pound.
“It’s not selling off quite like the others are,” said Kona Haque, a commodities analyst at Macquarie Bank. “Coffee is holding its ground.”
Analysts say the warning signs flashing in the coffee market will soon become more visible through the uncertainty caused by Europe’s debt crisis. “The fundamental picture is taking a back seat because everyone is worried about Europe,” said Marcio Bernardo, an analyst at brokerage Newedge. The problems in Colombia come as global coffee supplies already are strained. The last crop out of Brazil, the supplier of more than one-third of the world’s coffee, was a relatively small one. Additionally, Central America was hit by heavy rains at the start of its harvest in October, which are expected to clip production in El Salvador and Guatemala.
World output of arabica coffee will shrink 4.3% to 79.6 million bags in the current crop year, which began in October, according to the London-based International Coffee Organization. The National Federation of Coffee Growers of Colombia, or Fedecafe, isn’t giving a firm forecast for next year’s crop, saying estimates are hard to make given the large amount of rain that came down this winter. For the past three seasons, the quasigovernmental organization set lofty production goals but came up short. The fact that they are demurring this year is telling, says Jack Scoville, a broker at Price Futures Group.
“They’re trying to be very cautious as to what they say,” Mr. Scoville said. Analysts say that in the best-case scenario, Colombia’s output in 2012 could be comparable to this year’s, which Fedecafe expects to total around eight million bags, each weighing 60 kilograms. In a good year, Colombia produces about 11 million bags. Meanwhile, demand for coffee is growing. Consumption has risen 2.5% every year on average over the past decade, the ICO said, citing the growth of niche markets and new consumers in emerging markets.
Problems in the euro zone could pinch global demand as the European Union has the highest coffee consumption per capita in the world. Another factor that could mitigate Colombia’s production problems is Brazil, which is forecast to harvest a big crop next year. Last week, Brazil’s National Coffee Council said the country will produce as much as 52 million bags, a 18% increase over last year. The council’s forecast is conservative compared with private estimates that are closer to 60 million bags. However, Brazil’s harvest doesn’t begin until May. Until then, the market must grapple with another possible shortfall from Colombia.