NEW YORK (Dow Jones)--Move over, Juan Valdez. A conflict is brewing over Brazil's role in global coffee markets.
Poor weather and pests have hit sought-after Colombian coffee beans, symbolized by the iconic Juan Valdez and his mule, creating a shortage that has propelled coffee futures prices 19% since June 7.
Brazilian growers, however, are stepping in to fill the gap. Brazil, the world's largest coffee producer, is expected to boost output of arabica coffee beans, which are more desirable than the robusta variety, by 27% in the 2010-2011 marketing year, according to U.S. Department of Agriculture estimates published Friday.
There is a move afoot to codify Brazil's rising status as a premium supplier by allowing delivery of its beans against the ICE Futures U.S. coffee contract. ICE's coffee consultation board last week finished soliciting comments on a proposal to include Brazil's arabica beans that have been cleaned and sorted with water, rendering them "washed" or "semi-washed."
Industry groups in Colombia say that, if implemented, the proposal would dilute coffee prices on ICE futures, also known as the "C" contract.
"You would have the C contract flooded by Brazilian coffee and it would pull the price of the contract as a whole down," said Juan Esteban Orduz, president of Colombian Coffee Federation Inc. "It will be a reference more for Brazilian coffee than Central American coffee."
Brazil's coffee beans are a lower quality than beans from Central America, which is why the proposal in front of ICE's coffee board calls for a 7-9 cent discount to ICE coffee futures, which ended 0.8% lower on Monday at $1.5895 a pound. The issue has been discussed in the past but has been revived due to shortages of Colombian beans. If the ICE coffee board approves any changes, they need to be affirmed by the U.S. Commodity Futures Trading Commission.
Coffee prices reversed course Monday after touching fresh 27-month highs as tight supplies attracted new buying from speculators like hedge funds and banks in recent weeks. Analysts said the market is due for profit-taking and correction in light of the recent rally. Sales were triggered Monday when the recovering dollar made futures more expensive in other currencies. Most-active September coffee futures could correct back to $1.57 in the near term, said
Sterling Smith, market analyst at Country Hedging in St. Paul, Minn. Buying from roasters, who are likely waiting for lower prices would help the coffee market retain recent gains, a Miami-based coffee broker said.
Coffee drinkers would notice little change, as Brazilian beans have filtered into blends sold by roasters over the past several years as harvests from the South American country have grown. The current harvest is expected to be a record 55.3 million bags of both arabica and robusta coffee beans. One bag weighs 60 kilograms.
Washed coffees account for roughly 10% of Brazil's arabica production, said Gil Carlos Barabach, a coffee analyst at agricultural consultancy Safras & Mercado in Brazil. Coffee is generally produced by larger agribusiness's operations in the country compared to producers like Colombia. Brazilian producers therefore have the capacity to produce at lower costs and can ramp up the production of washed coffees to meet demand.
"Brazilian producers will strongly enter [the washed coffee market] and can dominate this market," Barabach said.
A greater supply of washed coffee would trigger wide-reaching effects for the small farmers, said Ricardo Villanueva, president of Guatemala's national coffee association, Anacafe.
Coffee is the country's main export and 50% of producers are small farmers. They could be forced to grow illegal cash crops like marijuana and coca--the main ingredient in cocaine--to supplement lower incomes from coffee, Villanueva said.
ICE coffee warehouse stocks decreased by 1,505 60-kilogram bags Monday to total 2.25 million bags, according to exchange data.
ICE coffee open interest--the number of active positions left at the end of the session--increased by 2,485 lots Friday to total 159,282 lots, according to exchange data.
Volume was estimated at 30,306 lots, according to exchange data. In options, approximately 3,442 calls and 4,985 put options traded on the floor.
ICE Change Range Liffe Change
Jly $1.5895 -1.30c $1.5610-$1.6410 $1,538 -$5
Sep $1.6080 -1.30c $1.5835-$1.6545 $1,573 +$2
Poor weather and pests have hit sought-after Colombian coffee beans, symbolized by the iconic Juan Valdez and his mule, creating a shortage that has propelled coffee futures prices 19% since June 7.
Brazilian growers, however, are stepping in to fill the gap. Brazil, the world's largest coffee producer, is expected to boost output of arabica coffee beans, which are more desirable than the robusta variety, by 27% in the 2010-2011 marketing year, according to U.S. Department of Agriculture estimates published Friday.
There is a move afoot to codify Brazil's rising status as a premium supplier by allowing delivery of its beans against the ICE Futures U.S. coffee contract. ICE's coffee consultation board last week finished soliciting comments on a proposal to include Brazil's arabica beans that have been cleaned and sorted with water, rendering them "washed" or "semi-washed."
Industry groups in Colombia say that, if implemented, the proposal would dilute coffee prices on ICE futures, also known as the "C" contract.
"You would have the C contract flooded by Brazilian coffee and it would pull the price of the contract as a whole down," said Juan Esteban Orduz, president of Colombian Coffee Federation Inc. "It will be a reference more for Brazilian coffee than Central American coffee."
Brazil's coffee beans are a lower quality than beans from Central America, which is why the proposal in front of ICE's coffee board calls for a 7-9 cent discount to ICE coffee futures, which ended 0.8% lower on Monday at $1.5895 a pound. The issue has been discussed in the past but has been revived due to shortages of Colombian beans. If the ICE coffee board approves any changes, they need to be affirmed by the U.S. Commodity Futures Trading Commission.
Coffee prices reversed course Monday after touching fresh 27-month highs as tight supplies attracted new buying from speculators like hedge funds and banks in recent weeks. Analysts said the market is due for profit-taking and correction in light of the recent rally. Sales were triggered Monday when the recovering dollar made futures more expensive in other currencies. Most-active September coffee futures could correct back to $1.57 in the near term, said
Sterling Smith, market analyst at Country Hedging in St. Paul, Minn. Buying from roasters, who are likely waiting for lower prices would help the coffee market retain recent gains, a Miami-based coffee broker said.
Coffee drinkers would notice little change, as Brazilian beans have filtered into blends sold by roasters over the past several years as harvests from the South American country have grown. The current harvest is expected to be a record 55.3 million bags of both arabica and robusta coffee beans. One bag weighs 60 kilograms.
Washed coffees account for roughly 10% of Brazil's arabica production, said Gil Carlos Barabach, a coffee analyst at agricultural consultancy Safras & Mercado in Brazil. Coffee is generally produced by larger agribusiness's operations in the country compared to producers like Colombia. Brazilian producers therefore have the capacity to produce at lower costs and can ramp up the production of washed coffees to meet demand.
"Brazilian producers will strongly enter [the washed coffee market] and can dominate this market," Barabach said.
A greater supply of washed coffee would trigger wide-reaching effects for the small farmers, said Ricardo Villanueva, president of Guatemala's national coffee association, Anacafe.
Coffee is the country's main export and 50% of producers are small farmers. They could be forced to grow illegal cash crops like marijuana and coca--the main ingredient in cocaine--to supplement lower incomes from coffee, Villanueva said.
ICE coffee warehouse stocks decreased by 1,505 60-kilogram bags Monday to total 2.25 million bags, according to exchange data.
ICE coffee open interest--the number of active positions left at the end of the session--increased by 2,485 lots Friday to total 159,282 lots, according to exchange data.
Volume was estimated at 30,306 lots, according to exchange data. In options, approximately 3,442 calls and 4,985 put options traded on the floor.
ICE Change Range Liffe Change
Jly $1.5895 -1.30c $1.5610-$1.6410 $1,538 -$5
Sep $1.6080 -1.30c $1.5835-$1.6545 $1,573 +$2
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