• QA 219
    What impact could current high prices for Colombian coffee have?
    Why have prices for Colombian coffees risen so steeply of late? And what will be the longer-term impact if any?
    Asked by:
    Financial analyst - Singapore

    Current high prices (May 2009) are due to unsatisfied demand and short covering in the face of reduced production. *

    Trade sources estimate that Colombian production for the 2008/09 coffee year may well have been some 2 million bags less than in previous years. Partly due to unexpected weather conditions but, it is suggested, also in part due to an extensive rejuvenation process that has reduced the number of bearing trees quite considerably. Over the short term this inevitably leads to a reduction in output but, over time production is expected to increase substantially as and when the rejuvenated trees return to full bearing.

    The fall in 2008/09 production must be seen against an annual production of, on average, between 11.0 and 12.0 or 12.5 million bags. The price impact of this major (and largely unexpected) drop in supply has been quite severe: compared to the New York C Contract the premium for Colombian coffee rose from average 2 cts/lb in January 2008 to average 20 cts/lb by the end of 2008. By the end of April 2009 the premium (or differential) had however reached some 70 cts/lb, a situation of great concern to those roasters in need of Colombian coffee for their 100% Colombian retail brands.

    As to the longer-term impact, the immediate consequence of this kind of unexpected price jump for a single origin, in this case 100% Colombian coffee, inevitably leads roasters to re-examine the production of single origin brands. If they maintain production they simply have to pay the going price but if this cost becomes too high then some, if not many, may well reposition such brands as a 'Colombian type' coffee. This then leaves them free to match the taste requirements through the blending of different origins, relieving them of having to rely on just the one origin. This, of course, applies to nearly all single origin coffees - not just to Colombia.

    The issue here is that once industry and consumers get used to such an 'XYZ type' product, it may be difficult to regain lost ground once production returns to normal. In the case of Colombia there are vastly differing views when this will be: already end 2009 or only sometime in 2010? Furthermore, projections are that on completion of the rejuvenation program Colombian production may reach as much as 17 million bags in year 2014.

    We cannot comment on the accuracy of such estimates but it would be ironic if such increased production were to face an industry that has in the meantime learned to live with much lower supply…

    Put differently: If coffee prices generally rise strongly due to an industry-wide shock then individual producing countries are unlikely to see more than a potential overall lessening in demand, and possibly some down-trading quality-wise by industry. But, if a single origin's price rises strongly, independently of the general market due to internal causes then, depending on the severity of that situation, we would suggest it could well impact on industry's willingness to continue promoting it as a single origin retail product.

    * See topic 10.01.02 for more on 'short covering'.

    Posted 07 May 2009

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