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Guesses, Anyone?By Stuart Daw (originally appeared in Vending & OCS, Sept/Oct 2000) You answer the early morning phone call and hear your commodity broker’s voice on the verge of panic, shouting "Frost in Brazil last night. The train is leaving the station." What he’s driving at of course is that the green coffee market is going to rise wildly today and if we don’t quickly cover ourselves, we’ll have missed the train - insufficient inventory on a rising market! He may be right, but then again he may be wrong. The frost may have been light and too far south in Brazil to matter much any more as, after successive frosts, the whole coffee culture of Brazil has moved north (in Brazil north is hot, south is cold). There may be a glut of coffee on the world scene. Other coffee growing countries may be harvesting larger crops this year, enough to make up for any Brazilian shortfall, and anyway the projected Brazilian crop was dangerously large, threatening a steep drop in future world coffee prices. What to do!! There are two types of brokers — one type deals in "technicals." He loves to cite past trends, the peaks and valleys that seem to consistently repeat themselves over time. He might be called a philosophical Empiricist, oblivious of current coffee market conditions, using empirical evidence from the past to predict the future. He has a point, but the trick is to know when you’re at the peak or when you’re in the valley. And as long as he sells you a contract, he is not too concerned about that particular kind of technicality. More important in making buying decisions in the long run are the "fundamentals," the realities of total world supply and demand. Because Brazil swings such a large club, providing nearly half the world’s supply of arabica coffee (depending on the particular year), what happens there is paramount. Next year’s Brazil crop was predicted to be a record of over 40 million bags, which surely would have brought downward pressure on prices. But the frost of this past season that struck the southern coffee growing regions of Parana and Sao Paulo, combined with the summer drought which lowered water tables generally have, according to some sources, dropped crop expectations by perhaps 9 million bags. Much depends on the rainy season which normally begins around September 15, but as of this writing, August 31, seems to have begun. Ironically, a small amount of rainfall coming too early causes a premature flowering of the trees, bad for cherry development. It is crucial however for the September rains to have arrived to compensate for the dry summer. One will be able to see the nervousness of the market, moving quickly up or down, depending on these rains. Meanwhile, what we know from around the rest of the world indicates pretty good production, including, surprisingly, from Colombia, where predictions are emanating of a very large crop, perhaps 12 million bags, well above last year. But Colombia, the second largest coffee growing nation, is plagued by civil war, with rebels holding maybe one third of the country. An unemployment rate of 20% provides warring factions with plenty of recruits. The US is now committing money, equipment and men to aid in the "war against drugs," while many Colombian farmers do much better growing coca and poppies than they do growing coffee. Will that bumper coffee crop get to the market, as coffee in troubled countries always seems to do? The retention plan, an international cartel of growing countries in which each agreed to "retain" 20% of its crop, may turn out to be meaningless, for although importing nations believed it meant cutting exports by 20%, in a Clintonesque-type move the producing countries said, in effect, "It all depends on your definition of the word retention." They really meant they would keep in inventory an amount of coffee equal to 20% of their exports, even allowing themselves to export more than last year. Given a good level of production to add to existing inventories, most countries will have no trouble holding that amount in reserve. Stocks are rising in importing countries, with an additional 300,000 bags added to US inventories being announced in August. Given a few more months of that kind of action, importing countries will be insulated from the Shakespearean "slings and arrows of outrageous fortune" simply by realizing, as Karl Marx might have said, "The goods are here." In spite of the general bearish appearance of the market today, one never knows when one will be blindsided by some wild, irrational development in the world coffee situation. All of the above, I hope, gives the reader just a taste of what it’s like making green coffee buying decisions in a very uncertain business. © 2000 Stuart Daw
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