Commodity Caffeine Fix: Wake Up and Smell the Coffee

Spend Matters welcomes a guest post from Robert Miles, at Mintec Ltd.

World coffee prices may start to receive additional price support later this year amidst buoyant demand for coffee from export markets and emerging countries such as Brazil, whose accelerating economic growth has helped to make premium-blend coffee drinks more affordable among its rising middle class.

There are two main varieties of coffee: Arabica (about 60% of world coffee production) and Robusta (40%). Coffee plants begin producing fruit after three to four years. They need another three years, however, to reach full fruit production. When the fruit of the coffee tree is ripe, it is usually picked by hand, although it can be harvested mechanically. It is then de-fruited, dried, sorted, and sometimes also aged before it is roasted to give it its characteristic aroma and brown colour.

Arabica coffee is usually cultivated in milder tropical regions of America, Africa and Asia at higher altitudes. Robusta, on the other hand, can easily thrive in harsh environments such as tropical rainforests. Arabica coffee has a mellow flavour, usually described as sweet, round, slightly acidic and chocolaty with pleasant bitter notes. The cultivation of Arabica is more cost demanding than Robusta, which is reflected in its higher market price. Robusta coffee, meanwhile, has a more bitter flavour and is widely considered to be inferior to Arabica in both aroma and taste. Most of this variety is used for low-priced and instant coffees, although premium Robusta can be found in some espresso blends.

Arabica coffee in Brazil follows a two-year (biennial) cycle of alternating higher and lower productivity. The country typically produces around 20% more coffee in a higher yielding year of its Arabica production cycle.

World coffee output for 2012/13 is forecast at a very strong 148m bags, up 7.6% (or 10.4m bags) on the previous year. This is largely due to Brazil's Arabica crop entering the on-year of its biennial production cycle, and is aided by record Robusta harvests expected in Vietnam and Brazil.

The difference between Arabica and Robusta prices recently widened however, after Arabica prices rose briefly in July on new fears of heavy rain damaging the quantity and quality of the crop in southern Brazil. Early forecasts for the 2012/13 crop in Brazil, pegging total coffee output there at 55.9m bags, up 13.6% on 2011/12, with 40.2m bags of Arabica and 15.7m bags of Robusta expected in 2012/13. These early forecasts for the 2012/13 crop year may have to be revised in light of the poor weather recently seen in the region.

In Colombia, top producer of high quality Arabica coffee, the 2012/13 crop is forecast at 9m bags, up 6% on 2011/12. However, as Colombia copes with problems with cherry borer and rust, this volume is well below the 12.5m bags average more typically seen. In Vietnam, the world's largest supplier of Robusta coffee, total output is expected to rise 6.9% to 21.6m bags in 2012/13.

There could well be a bitter taste let in the mouth of many Americans, as increased Brazilian consumption would mean less exports -- Brazil (the largest coffee producer) is expected to overtake the US as the world's top consumer of coffee within the next few years.

- Robert Miles, Mintec Ltd.

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