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Global economic concerns and expectations for a strong harvest have sent coffee prices lower in the last few months, but strong demand and potential weather issues during harvest may give coffee the jolt it needs to get back to $3.00 a pound.

Despite a rise in prices from several coffee companies, U.S. coffee demand increased 2% from June 2010 to June 2011, according to the International Coffee Organization. The world's largest consumer of coffee has put pressure on already low supplies, especially in good quality Arabica coffee. Increasing coffee consumption from emerging markets will also continue to keep supplies tight.

Supply Concerns

Supply concerns have been prominent in some of the world's top coffee producing and exporting countries. Brazil, the world's largest producer and exporter, had an August frost that will have little effect on this year’s harvest, but could decrease yields in 2012. Columbia, the third largest producer and exporter, suffered heavy rain during harvest, sending coffee prices up 25% in August. Due to weather issues, coffee exports in Colombia dropped 38% and Colombia experienced the lowest level of production since September of 1988.

Brazil is expected to yield a record crop of over 55 million bags in 2012. The expected yield will still not satisfy the 62 to 64 million bags needed to meet demand in the coming two seasons though, according to Rabobank. To accomplish an ideal yield, there will need to be sufficient precipitation for a healthy flowering season. The threat of another La Nina this winter will heighten the supply risk leaving prices volatile.

If Brazil comes close to producing a record crop for 2012, it could be a bearish force on prices. The large crop forecasted for Vietnam, the second largest producer and exporter, could also weigh on prices. These strong crops may relieve pressure on prices, but will only be a short-term solution. It takes three to four years for a new coffee tree to become productive, leaving coffee in short supply for the next few years.

Outlook

Tightening supplies, not only in coffee, have increased global commodity prices over the past two years. Inelastic coffee demand and limited supplies should keep prices elevated, even with potential record high yields for 2012. Any sign of issues related to the 2012 crop may send prices back towards $3.00. Keep a close eye on the La Nina weather pattern forming.

Wake up and smell the coffee, it might be too expensive tomorrow.

Source: Will Coffee Prices Continue To Soar?