Posts Tagged ‘Central America’

The terminal or commodity coffee market has been crazy these last months

Reaching near historical highs above $3/ Lb a few months back we now appear to be in a doldrums… ranging around 220 > 240 c / lb awaiting fresh fundamental € zone economic news, before funds and specs decide where and how to make their money next

The sad reality for us mere mortals, is that the bankers that wreaked havoc and left us on the edge of an abyss in late 2007,  have long since moved under ground…frigthened by uncertain returns in equities, they have instead focussed on the commodity markets… driving prices wildly higher…with the knock on effect that you and I pay more for basic items on the high street

So where are we now and what happens next?!

Well in a non fundamental market it is almost impossible to say…so the following comes with the usual health warning!

Key factors at this time / Pertinent to forward pricing;

1)     All accredited coffees remain in very short supply

2)     And demand remains high for these coffees – especially in Northern Europe

3)     Additionally- there is no significant benefit to the growers to adhere to the strict  guidelines and rules and regulations associated with accreditation – therefore restricting supply

4)     Growers have made good returns in the last 18 months

5)     Those that have accredited beans therefore do not need to sell urgently and hence differentials remain firm

6)     Unless there is a bumper crop in Brazil this year ( 60m bags+) which now looks uncertain, supply and demand problems could continue into late next year

7)      There have additionally been fundamental issues associated with La Niña

8)      Heavy rains in Central American have created significant havoc and damage – limiting the flow of beans to market / port. This has particulalry affected Peru / Honduras and kept C2 differentials stubbornly in the low  +20’s

9)      Similarly, heavy rains in Colombia have affected their crop, which is now forecast at c 8 m bags- below the original estimate and near recent  lows for historical Colombian harvests

10)   Meantime, continued € zone uncertainty means funds and specs continue to intervene in the market, with yesterday’s 10 cent trading range a clear indication of their continued activity and influence in the market place

The result of this is that;

1)     Monkey see prices continuing firm above the current base of 220 c / Lb for the time being  to the end of 2011 and possibly into Q1 2012

2)     Monster believes thereafter, as the Brazil crop forecasts become confirmed, that the market could ease

3)     Guru advises however, it may well be that the market has already ‘discounted’( or allowed for)  a large Brazil crop in current market prices and that therefore there my be little further easing!

4)     We see all differentials remaining firm – especially now C1 and C2 due to the harvest/ distribution problems listed above

5)     However, because Brazil differentials are ridiculously high, we now see many roasters switching out of Brazil into cheaper Central American coffees… !

This is a trade first, as Central American coffees are considered superior to Brazilian beans…the result of this will be to further firm C American prices until Brazils return to lower levels ( An RFA Brazil today could be as much as + 50 c / Lb vs a C. American coffee at + 20 c / Lb)

6)     ‘Notice day’ on the market will be in c 7  days time, at which point December comes off the trading board… therefore –  the prices for Q2 should automatically ease  by 2 > 3 cent / Lb

So the bankers that started the espresso craze in London’s posh coffee shops…are now the ones fuelling the price increases we all have to bear! Ironic…but at least you can drown your sorrows in a fabulous cup of aromo espresso…made from one of our superb ESE espresso pods…so go on treat yourself and then move to a croft on Harris….!

What price the coffee in your espresso?

With coffee prices remaining high and stubbornly firm around 220 > 230 cent / Lb you have to wander what on earth is going on in the market place….? Coffee is quoted at a market price – This is base price. This price is used as a guideline and to buy and sell “paper coffee” contracts

To the base price a “differential” needs to be added

The differential is the +ve or –ve at which origin coffees and gourmet coffees trade vs the market price

The market price + the differential = The Free on Board Price (FOB)

Onward delivery to European port is an extra charge and can be quoted –

CIF (Cost/Insurance/Freight) FOT (CIF + Beans out of warehouse) FIF  All costs delivered to factory door

Ok so what influences coffee prices…? Well traditionally, fundamental factors were most important- but as recent intraday trading volatility and ranges show, speculative and fund driven activity is now a key driver

In general terms then most important factors are

Supply > Demand

Eg: Kopi Luwak + 6500 c/Lb bags vs Brazil 45 m  60 kg bags pa -5 c/ Lb

Increasingly accredited coffees are seeing differentials firm due to supply > demand concerns

As a result of higher terminal market prices many farmers are leaving accredited systems such as Utz / Fair Trade and Rain Forest Alliance. This at a time when demand from Northern Europe is growing strongly…the net effect we now see RFA Brazils with CIF differentials at an aboard +50 whilst Centrals can be had at + 20…

Elasticity

Traditionally, elasticity was also a major influencer of differential price…by this we mean the ability to find an alternative coffee within the flavour family. Colombian is a good example…..if you want / need and specify Colombian Coffee nothing else will do….! Hence Colombian differentials (+45 > 60)

Screen size

The size and beauty of the beans you want! Brazil Grinder   (-15c / Lb) Mexican Maragogype (+ 250 c /Lb) (Measured in sizes < 12 > 19 – 23)

Altitude of Plantation

Altitude is all to the coffee snob…..although South Africa (now growing Arabica at sea level ) and Thailand where fabulous Arabica is grown at or less than  600 metres seem to blow this rule away…

Other good examples:

Central American Coffees Honduras HG / SHG c 30c > 50 Lb

Guatemala HB / SHB c 20 > 35 c Lb

Defects

How many funny bits per 100 beans or 300g

Flavour characteristics (Within the family)

Brazil Good Cup vs Fine Cup (+ 5 c Lb)

Kenyan   A > AAA (Size) FAQ > TOP TOP (Taste) = + 250 c / Lb range

Fundamentals

Frost – Drought – Earthquake – Meteorological phenomena

Speculators

Lower equities encourage speculators to look for a return elsewhere

Supply & Demand – Fundamentals

Coffee consumption is growing – New /Emerging Markets – China New Consumption – In Origin New Consumers – European Café Culture Improved agricultural techniques & replanting programmes

So ! Coffee pricing is complicated… and has grown ever more complicated in the current volatile economic climate where commodities seem a safe investment bet! Rest assured, you don’t need to worry about any of this with our fab ESE espresso pods…  we keep a strict eye on consistent quality… Guru’s old friend has over 50 years expertise …he spits and slurps and gives us the nod before we pack and send our finest espresso to you to savour and enjoy in the comfort of your own home…lucky you!

Image via Wikipedia