Coffee drinkers treated to more arabica as prices sink

Coffee drinkers treated to more arabica as prices sink

1:17pm EDT

By Sarah McFarlane

LONDON (Reuters) – Coffee drinkers in Brazil, America, Eastern Europe and the Middle East are expected to down more arabica beans in their brew in the coming year as cheap prices attract additional demand for the higher spec product. A surplus from top grower Brazil after two successive bumper crops helped drag arabica prices to a four-and-a-half-year low this week, which is likely to prompt roasters to increase the use of the bean in their blends.But drinkers detecting more of arabica’s distinctively sweeter, gentler notes in their cup will probably be saying more about the power of suggestion than their discernment, as roasters will only be tinkering with blend changes that consumers are unlikely to notice.

A Reuters poll of 10 international coffee traders and roasters showed that between 3 and 4 million 60-kilogramme (132 lb) bags of coffee demand – out of a market total of more than 140 million – is forecast to switch out of robusta beans into arabica in 2013/14.

Arabica beans are usually found in high quality brands and typically trade at a premium to the hardier, more caffeine-rich robusta beans, which are widely used in instant coffee.

Lately the price difference between some of the lower grade arabicas and robustas has been eroded, putting in reverse the trend from 2011/12, when roasters increased the proportion of robusta in their blends to the tune of around 5 million bags globally due to a historically high premium on arabicas.

“Clearly it’s happening, although I don’t think it’s going to be as big as the switch we saw out of arabica in 2011/12,” a European analyst said.

“The biggest swing is in Brazil.”

The world’s top coffee grower is also one of the largest consumers, using over 20 million bags a year. Up to 1.5 million bags of Brazil’s domestic robusta consumption was forecast to switch into arabica in 2013/14.

“Domestic roasters are fairly flexible so they can move out of robusta into low-grade arabicas on a large scale,” said a trader, adding that Brazil was a very price-sensitive market.

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Coffee roasters, typically secretive about their blends, stepped up substitution of arabicas with robustas after ICE benchmark arabica futures rose to a 34-year high in May 2011 and the premium over robusta hit about $1.90/lb.

The premium has since narrowed to below 40 cents, and dealers said it could shrink further.

There is a wide spectrum of qualities within the arabica and robusta varieties, so the premium varies between different grades, with traders noting that Brazil’s rio minas arabica had traded at a discount to some robustas in the past month.

“There will be switching, but the quantity will depend on the quality of low-grade arabicas,” a trader at an international roaster said.

Roasters have become more nimble in recent years to enable themselves to react to prices and availability.

“In general customers (roasters) have become a little bit more flexible in comparison to 10 years ago. In the past the blend or ingredients were written in stone, they were untouchable, and that has changed,” a coffee trader said.

Beyond Brazil, traders and roasters said America, Eastern Europe and the Middle East could also see some switching, the trader said, noting that emerging coffee markets were less sensitive to taste changes.

“In emerging countries people go more for price than anything else; they are not so picky quality-wise,” the head of coffee at an international trade house said, adding that the Western European market was not as flexible.

Robusta coffee futures traded at a three-year low this week, but traders were more bullish on their price outlook versus arabicas, pointing to low exchange stocks as a trigger for future price rises to attract fresh beans. [ID:nL5N0ID3XO]

In September brokerage Marex Spectron forecast 2013/14 global coffee supply and demand at close to balanced, after a 7 million bag surplus – all in arabicas – the previous year.

Brazil’s coffee production rises and falls from one year to the next due to its biennial cycle, as arabica trees need time to recover after bearing large quantities of cherries.

The variations between ‘on’ and ‘off’ years have been diminishing, however, partly due to improved maintenance, replanting of trees with higher-yielding varieties and increased use of fertilizer and irrigation.

The International Coffee Organization has not yet published forecasts for 2013/14. It estimated 2012/13 global production at 145.2 million bags, of which around two fifths is robusta. The ICO pegged world consumption for calendar year 2012 growing 2.2 percent to 142 million bags.

Future demand growth is expected to be focused in Asia, the region where most of the world’s robusta is grown, and where coffee is mostly consumed in the form of soluble or instant.

“I don’t think that (the switching) means robusta demand is falling. I think demand in Asia is strong enough that it more than cancels any of that out. Both robusta and arabica demand will grow this year,” a trader said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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