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  • QA 148
    Question:
    Why is price correlation between Brazilian robusta and the London futures market so low?
    Background:
    Considering Brazil is the world's second largest robusta producer, why is the correlation between Brazilian spot robusta prices and Liffe so low?
    Asked by:
    Financial analyst - London
    Answer:

    Probably the most important factors are Brazil's huge domestic consumption and the country's large exports of soluble coffee that, together, mostly drive prices for Brazilian conillon robusta.

    Even though current conillon production is around 9 to 10 million bags, it should be noted that Brazil itself consumes some 16 million bags of coffee. Brazil is easily the world's second largest consumer of coffee, behind the United States but well ahead of the third largest, Germany. We do not know the precise proportion of conillon in Brazilian domestic consumption, but it is substantial at around one third or even more. In addition the soluble industry probably accounts for a further 3 million bags or so. Finally, the Mercosur markets of South America are ready takers of Brazilian conillon as well. *

    We are aware that much of the time domestic conillon prices render export unattractive if not impossible. Consequently, foreign roasters seeking to lessen their dependence on Vietnam, currently the world's largest robusta exporter, really have to compete for a share of the Brazilian production.

    The conillon story to date certainly proves the importance and value to a producing country of a progressive domestic roasting industry. Conillon producers enjoy local demand that renders the relevance of futures markets relatively unimportant, also because most local roasters do not price their coffee purchases in the same way as do the large multi nationals in Europe: the local robusta futures contract in Sao Paulo at the Brazilian Mercantile and Futures Exchange (www.bmf.com.br) did not record any trade in 2006… In contrast, the arabica contract traded very actively indeed - see Section 08.07 of the Guide. **

    In our view conillon prices will only 'fall into line' so to speak if production were to rise to substantially exceed current demand. There have been instances where export prices have been attractive vis-à-vis EuronextLiffe quotations and larger volumes of conillons might well trigger more price correlation. However, given the continuing strong growth in Brazilian domestic consumption we would not expect to see this any time soon. We would also question in how far closer price correlation would be of  benefit to Brazilian producers…

     

    * To read more about the Brazilian domestic industry we recommend visiting http://www.abic.com.br/estatisticas_us.html for the 2006 Annual Report of the Brazilian Coffee Roasters Association. See also Section 02.07 of the Guide.

    ** Most mainstream roasters in Europe purchase their green coffee by pricing it through a differential vis-à-vis the New York (arabica) or London (robusta) futures markets. For more on this see topic  01.04.02 and section 09.02 of the Guide.

    Posted 10 May 2007

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    QA 040, 098