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Record 2013/14 Brazil Coffee Crop to Lessen Leaf Rust Impact

Source: Reuters
25/07/2013

July 25 - An outbreak of leaf rust disease in Central America is unlikely to boost coffee futures prices that are near their lowest in four years because a record crop in Brazil will fill the gap, according to a Reuters poll.

While a crop-damaging fungus known as "roya" will raise premiums for Central America's high-quality washed arabica coffee beans on the physical market, benchmark arabica ICE Futures U.S. prices are still likely to end the year at $1.3250 per lb, up 9.3 percent from current prices, according to a survey of 32 analysts, exporters and traders.

"The effect will be mitigated by a large Brazilian harvest and greater use of robusta," said Gil Barabach, coffee analyst with Safras & Mercado, an agricultural consultancy in Brazil.

"More optimistic economic signals could change this scenario by stimulating the demand for higher quality."

The uncertainty over roya is contributing to a wide gap in production forecasts for Central America and Mexico, ranging between 13.8 million and 18.5 million 60-kg bags in the upcoming 2013/14 (October/September) crop year, the survey showed. The median estimate at 16.49 million bags of coffee would be a drop of 4.7 percent from the previous season. This expected drop in production is less severe than many were estimating months and even weeks ago.

The median estimate for 2013/14 production in Brazil is 53.05 million bags, a record large crop if realized and up 4.4 percent from last year, according to International Coffee Organization (ICO) data. Poll estimates ranged widely from 48.5 million to 63 million bags.

"A greater impact in the futures markets is slowed by the greater production in unwashed arabicas that are not completely consumed and accumulate more inventory, principally in Brazil," said Fernando Celis, president of the national coffee farmer's alliance CNOC in Mexico.

Damage from roya left its mark in Central America and Mexico in the 2012/13 crop year, when yields dropped 14.9 percent year-over-year. Earlier this year, the ICO said it expected 2013/14 production to be hit even harder by the leaf rust.

The fungus appears as powdery orange spores on the underside of infected leaves, eventually turning them black and causing them to fall off, either killing or significantly weakening the tree, reducing yields and affecting bean quality.

"These countries are currently confronting the roya outbreak with preventative measures, which means the damage could be less severe during the 2013/14 harvest," said Victor Hugo Molina, director of Honduras' national coffee institute Ihcafe.

"However, the full recovery of coffee plantations in the affected countries will take between three to five years."

One trader at an international trade house in Brazil said the market already considers the impact of the roya as much lower than believed even three or four weeks ago.

Several poll participants added that the quality of coffee grown in Central American and Mexico will also be affected by roya, causing roasters who do not need to purchase beans from the region to go to Brazil, Asia and Africa for supplies in the next crop year. Production in Peru has also been hampered by roya.

THE FUTURE OF COFFEE FUTURES

Arabica coffee prices on ICE Futures U.S. will be little affected by both roya and the global surplus, with abundant supplies already factored into the market.

ICE spot arabica futures are seen ending 2013 at $1.3250 per lb, up 9.3 percent from Wednesday's settlement and down 7.9 percent from the end of 2012. The contract is expected to average $1.3180 in 2014, up slightly from the four-year low of $1.1690 per lb set in June.

On the Liffe exchange, second-position robusta futures are pegged at $1,950 per tonne by the end of 2013, up 2.8 percent from Wednesday's settlement and up a slight 1.4 percent from end-2012. They are seen holding at an average of $1,950 next year.

Poll participants believed 2013/14 crops in the world's biggest coffee growers, Brazil and Vietnam, would set records, leading most of them to forecast a global surplus of beans.

Survey respondents expect the crop to reach a record 25 million bags in Vietnam, the world's biggest producer of robusta beans, up 13.6 percent from the prior year and a slight 3.9 percent from 2011/12, according to ICO data.

Robusta coffee costs less and is either processed into instant coffee or added to roasted blends to lower costs. Vietnamese harvest estimates ranged widely from 17 million to 29.5 million bags.

Most poll contributors expect a global surplus with the median estimate at 3 million bags, with projections ranging from a 3 million bag deficit to an 18 million bag surplus.

The global surplus of arabica beans, which are typically roasted for brewed coffee and range widely in quality, was estimated at 2.75 million bags, with ranges from a 1 million bag deficit to 14 million bag surplus. The median robusta estimate was for a 500,000 bag surplus, with projections going from a 2 million bag deficit to a 4 million bag surplus.

Koen Goos, a trader for Nedcoffee B.V., a large coffee trading company headquartered in Amsterdam, said there will be increasing demand from the soluble coffee industry, especially in Asia, when asked about the key factors seen driving the global market over the next year.

"Arabica will fight for demand versus robusta coffee," Goos said. "Even with record robusta coffee production, (the) farmer will be in control driving (outright) prices."



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