Green Coffee Market Update

December 26th, 2008

The ICE “C Contract” has been slowly drifting downward, while the differentials for washed coffees have sharply increased. Colombians have led the way in differential increases, recently rising by around 15 cents per pound with other, good washed arabicas following their lead.

Several important factors are affecting this confusion in the green coffee cost/supply situation. Figures from the U.S. Department of Agriculture indicate that coffee production in 2008-09 has hit an all-time high of 138.4 million bags (60 kilograms each). World imports of green coffee totaling 89.6 million bags also represent a record, but remaining stocks are high at 39.6 million bags.

Why then, with such high inventories, are we seeing the differentials, the premiums we have to pay for quality coffees, rise as they have? One reason is that Brazil is entering its biennial crop cycle in 2009-10, wherein off-year production has on average in the last six years fallen below on-year production by some 11.5 million bags.

In addition, Colombia is facing tough times of excessive cold and rainfall over the past 18 months, with production falling well below earlier estimates, leaving the country with near zero inventories at present. The weather has been especially bad in central regions, less so in the south where production has been rising relative to the rest of the country. But on balance the shortfall in this, the main crop of October through December, is expected to reach 15to 20%.

Other factors such as the high price of fertilizer necessary for high yields have had an effect on production in many countries. Of course the world’s current financial situation may mitigate toward lower world consumption, but the flight from stocks into commodities may also have an effect on coffee. In these uncertain times, it is very difficult to predict future price trends.

Barring some unforeseen happening, we see no reason to expect a sharp move in either direction. But we will keep a watchful eye on things just in case.

December 5th, 2008

Indicated in our last update was the possibility of a further erosion in green prices, and indeed the market has slipped by around 12 cents since then. Sharing much of the blame for this has been the falloff in commodity prices in general, but in fact coffee has held up relatively well against the others.

As a partial offset to all of this, the differentials over the "C Contract" paid for good grades of coffee have risen, mostly due to the trend set by Colombian coffee, where deliveries have been erratic amid concerns for a shortfall in supply, partly due to heavy rainfall causing a delay in the current Colombian harvest.

Foe Canadians, any diminution in green costs has been more than offset by the wild devaluation of the Canadian dollar, a short time ago trading at near par with the US$ only to suffer its version of 9/11 or a Tsunami by crashing, along with almost all non-US currencies.

As for the future, the effect on world economics of the present financial crisis will have more impact that any serious change in the supply/demand equation of coffee itself. Much uncertainty abounds, so it pays to exercise caution in purchasing and inventory level decisions.

Of course in the long run, "soft" commodities such as coffee and food in general are what we need to live on, and will always be in demand. But if coffee prices fall below the actual marginal cost of producing it, and there is at least some surplus in supply, growers needing cash might sell below that cost of production for a while. But eventually it has to rebound. The question then is, "when?"

Stay tuned!

November 11th, 2008

The market has been nervously oscillating between narrow margins, but is now almost exactly where it was on our last Update of October 16. Far more capricious has been the Canadian dollar, at par not long ago, then swinging wildly to as high as 1.29, now to around 1.20 to the USD.

Another condition is the increase in differentials demanded for quality coffee. Colombia in particular leads this parade, blamed on a lower yield in the Mitaca (second) crop, along with other problems such as the prolonged Colombian truckers' strike, now ended.

Chaos in world financial markets has cast a pall over commodities in general, with coffee finding it difficult to buck the trend. We await data on the consumption of coffee at both retail and foodservice levels. High prices for so-called specialty coffees have not as yet seemed to dampen demand in Fair Trade, organic, and FTO designations.

For production, recent heavy rains in Vietnam have caused some disruption in this, the world's second largest producer of coffee, essentially of the robusta variety. There are over 4.5-million bags in ICE certified stocks today, and many arabica producing countries will just be starting their harvest with no serious indication of lower production, though an off-year coming up in 2009 for Brazil will have the effect of tempering world stocks.

In short, the market seems relatively stable with any bias perhaps trending in the direction of lower green costs. But in a unstable world economically speaking, coffee growers need to be concerned for at least getting to the break-even point for their production. The current tight condition makes it less possible for them to invest in the fertilizers, pesticides, etc. needed to maximize production. All this makes it a tricky time for importers making buying decisions

October 16th, 2008

The chaos surrounding the world economic crisis has pulled all commodities downward, including coffee. This is despite supply and demand for coffee being roughly in equilibrium for the moment. But with the economic slowdown in consuming countries and the accompanying layoffs meaning lower incomes and less discretionary money to spend, world consumption is likely to fall. For the coffee growing countries, lower prices mean less ability to purchase fertilizers, pesticides and herbicides, resulting in lower production.

The rapidly fluctuating rates of exchange between various currencies has the effect of exacerbating the problem for coffee growers and importers alike. For our Canadian customers, their dollar has taken a plunge Vs the US dollar, more than canceling any beneficial effect the softening of the coffee market might bring.

Of course all this is "up in the air" until we can get a clearer picture of future economic conditions here and abroad. But for our customers, all of whom are of great value to us, we feel it unwise for them to make long-term commitments under today's conditions of uncertainty.

September 20th, 2008

Since our last report the market has softened along with the general decline in commodities that coffee seems to have resisted until now. The liquidation of long positions by the index funds has added to the decline. For Canada the weakening of the dollar Vs the USD has a somewhat offsetting effect, going as it has from the recent par to today's effective rate of 7% plus.

This is a difficult market in which to make predictions and limit risk. One US medium sized roaster has just reported having suffered a $2-million plus loss in the three months ending April 30/08, compared to a modest profit for the same period in 2007. To quote from the report: "The losses for the three and six month periods ending April 30, 2008 were due to sharp increases in cost of sales resulting from higher coffee prices and losses in options and futures contracts." TRANSLATION: "We gambled and lost."

A good lesson from all this: in a period of rather wild volatility in the markets, including the financial markets, one must be prudent in taking extended positions either way. This also applies to large foodservice buyers who wish to protect their costs, but in going long, for example, might be exposed to coffee costs well above competitors that are buying hand-to-mouth, as it were.

Basic conditions of supply and demand do not portend higher green coffee costs right now, with the closing of the Brazilian frost season, but large speculators can have a distorting effect by taking a long-range view of commodities in general, carrying coffee along on an unexpected upswing.

We will of course be watching with keen interest, in the best interests of Heritage's customers.

August 27th, 2008

Since our last report of August 15, the market has risen by 11 cents per pound for the December contract month. The main cause has been Hurricane Gustav approaching the Gulf of Mexico and headed in the projected direction of the Texas/Louisiana coastline.

While predicted to be "only" a Category 3 (the same as Katrina), and while it is not likely to cause any damage to oil rigs along the coastline, it has a strong psychological effect on investors who dislike being short over a long weekend with a hurricane on the way.

So not just oil, but coffee as well, with some 800,000 bags of certified stocks in storage in New Orleans, is of much concern. The last time great damage was caused by flooding in warehouses when Katrina struck.

Beyond this current threat, not much has changed, but these new recent highs establish new parameters for chartists and other speculators, so we probably can't expect an immediate full retraction once the storm threat is over. Three other disturbances are churning across the Atlantic toward the US coast, but they tend to be following a more northerly direction, and are too far away at present to allow for any accuracy in predicting their eventual targets.

For Canadian customers, the drop in the dollar Vs the US$ adds an additional dimension to the increased cost of green coffee. As usual, we'll keep you posted, and hope that Gustav is not "an ill wind."

August 15th, 2008

We like to keep our customers informed when anything happens to seriously effect the green coffee market. Since our last report of July 22, the market has been behaving according to the old saying, "The more things change, the more they stay the same, fluctuating between 1.30 and 1.40 in the active contract month. As of this writing, the December contract is 1.3705.

And there have been very few new market forces at work, the main one being the truckers' strike in Colombia. That is now in its third week, and is beginning to look serious, as the amount of coffee in port ready for shipment is of course limited, and coffee moving to port from up-country will be slow for some time. All this is causing a rise in differentials being quoted for Colombian coffee, which as usual affects other origins.

While the US$ has increased relative to most currencies, it has not done so for some, as with the Brazilian real. But for Canada, the rather sharp drop in the value of its dollar has had the effect of making green coffee costs commensurately higher.

In the long run, while this year's coffee crop (October-December) at 141.87 million 60-kilogram bags is 15% higher than last year, and more than enough to handle the increase in current demand, put at 126.2 million bags. But speculators, who tend to be influenced by the longer-range view, see next year's projected smaller harvest leaving the world with an insufficient "buffer level of inventories."

We have seen commodity people projecting a $2.50 green level by next summer. Fertilizer has become much more expensive, as has fuel, dampening any hope of a substantial increase in production from the same trees. ICO (International Coffee Association) head Osario comments that there are no economic incentives to planting more trees, and he points to the higher cost of labor, as in the now industrialized Brazil. In spite of that gloomy prediction, according to Brazil's Ministry of Agriculture Brazilian farmers have increased their incomes this year by a whopping 48%.

But in Vietnam, now the second largest producer of coffee (mostly robusta), where people have been leaving their farms for the cities, production is expected to stall at current levels, between 18 and 20 million bags. There are no serious changes elsewhere in the world to have an over-all impact on total production.

Because the Brazilian frost period is pretty well over, we see nothing objective affecting thing in the near future. But please stay tuned, just in case.

July 22nd, 2008

Since Our last report on July 7, the market has drifted gently downward by about 4 cents per pound. To put that in context, from the July 2007 low of $1.24 to the high in February of 2008 to around $1.62, we have now settled back to $1.37.50 as of the July 21 close.

Early in the Brazilian harvest period the fear of frost affecting the following year's crop always has everyone on edge. But typically as we progress through that May-August time zone with no bad weather news, the market tends to slowly recede.

In wondering about the near and long-term trends, there are plenty of variables to consider. The world economic future fuels many of these. High energy costs impact all production activity, resulting in higher commodity costs. Questionable government decisions regarding biofuels have put pressure on many agricultural products, not the least of which are dairy and meat costs. Obviously, if governments insist on pursuing this path, they need to employ what are known as "second generation" biofuels, not feedstocks needed in animal husbandry.

While coffee has not reacted as sharply as corn or soybeans, the whole upward trend in prices has invited much speculation while driving consumption downward. And fear of a world shortage of food further fuels that speculation. All this indicates a continued interest in agricultural commodities. Futures that used to driven by supply are now more responsive to demand. Higher market volatility is the result, and world stocks of coffee, while seemingly high at first glance, are low as a percentage of current world consumption.

The falling US$ has affected grower incomes, as with Brazil where the grower/shipper has to have higher prices to realize the same yield in local currency. The Brazilian Real has reached recent record highs vis a vis the US$, making shippers more withdrawn from the market, resulting in their demand for higher differentials.

At the retail level, the Starbucks announcement of having to close 600 stores with its concomitant of employee layoffs, may be casting a shadow on the specialty coffee business. This has been reinforced by the news that the McDonalds experiment in pricey, elaborate coffee variations has not lived up to expectations.

All this makes it hard to predict the trend. As the Greek philosopher Heraclitus said, "Everything flows, nothing abides." And so it is with the coffee business, where it seems sometimes as if we are all "lost in a Heraclitian flux."

July 7th, 2008

Beginning with our last Update June 7, 2008, the market behaved as we had predicted, as at the time we had no particular reason to anticipate a large move, absent any new word of a frost threatening Brazil's coffee growing regions. Then rumors on June 19 of a cold front approaching from the South created a reaction, especially among speculators, who usually react nervously to such news.

This is understandable for anyone in fear of being caught short on a rising market. So, anticipating the worst, a short bump in the market triggered stop losses and a bit of an over-reaction, and between June 16 and July 2, the market did rise 17 cents even though all weather forecasts had discounted the chance of any serious cold weather.

In the last two trading days it appears that cooler heads are prevailing, as we have seen a retraction of around 9 cents from the high cited above. One influence may be the raising of margin requirements (up $700 per contract for Specs), in an attempt to dampen what Alan Greenspan called "Irrational Exuberance" on the part of the "specs."

A stronger US$ helps the Brazilian exporter, encouraging him to sell. But Brazil is experiencing a declining trade surplus due to its own strong currency, nullifying some of that advantage. Meanwhile the Brazilian harvest is coming along nicely, and other tidbits of news minutiae from around the coffee growing world have not been significant enough to cause any price tremors. We will report to you any important news that might affect the world green coffee situation.

June 7th, 2008

The month of May saw green coffee rise by around 4 cents per pound while oscillating within a price range of 11 cents (1.29 to $1.40). Another 3 cent rise has been felt thus far in June. But typically we see a move up or down by as much as 5 cents from day to day, based on such things as a USDA announcement that the Brazilian harvest will be over 50-million bags, and other reports ranging from changes in US$ and Brazilian Real values, to long-range production and consumption guesstimates, to weather warnings such as that of this week predicting that a cold front will move into southern Brazil around mid-month. But absent a real, imminent frost warning, we expect prices to remain in their current pattern.

OTHER COFFEE TIDBITS:

World coffee production for the 2008-09 year has been placed at 127-million bags, up some 10-million bags over 2007-08. While the long-range trend seems to be around a 1% annual increase in production, consumption is rising at twice that rate.

Sales of organic coffee now represent 3% of all US and Canadian green coffee imports, at 84-million pounds in 2007. The jury is still out with respect to the relative long-range preference of consumers for straight organic coffee Vs Fair Trade Vs Fair Trade/organic. While Fair Trade is viewed by some as a bit of a scam for the benefit of its promoters, and Organic plays on people's fear of any attempt at technology in field husbandry for coffee production, the trend seems to be unmistakably upward.

Smucker's has bought the Folgers coffee brand from P & G for around $3-billion, a strictly stock transaction in which P & G shareholders wind up with 53.5% of Smucker's. The deal apparently includes the Millstone brand.

Coffee consumption in India's burgeoning economy is growing faster that tea, the traditional winner among India's consumers. Coffee sales have increased 7.4% in the past year, while Tea has risen only 2.9%. But to keep this in perspective, Indian coffee consumption is now at 80,000 metric tons, against tea's 800,000 metric tons, or 10 times that of coffee.

Stay tuned!

May 12th, 2008

Since our last report on April 28, the market has risen by about 9 cents per pound (Green, US$). One reason is the poor Mitaca crop (fly crop - off season) in Colombia. This, along with the Brazilian "National Commodities Supply Corp." (CONAB) report that, while raising official Brazilian government predictions above earlier estimates for the 2007/2008 crop (45.5 million bags Vs 41 million bags), still comes up quite short of the more reliable private call of between 50 and 53 million bags.

Which to believe? The speculators seemed to accept the CONAB news as a positive sign for higher prices. And long-range predictions for next year's lower crop cycle look bullish against a backdrop of rising world consumption. In spite of rather stagnant sales in western nations, the growth is essentially fueled by consumption in the Middle East, and in countries such as Russia, India and China.

But predictions of long-range shortages often ignore the fact that higher prices usually result in increased coffee production. Just one example this year could be El Salvador, where production (1.5 million bags) is the highest seen since 2001-02. We should remember that while new tree plantings take over three years to come into proper fruition, the higher prices enable the farmer to pay pickers better wages (read: ensuring the beans get picked), afford fertilizer and proper field husbandry.

Stay tuned!

April 28th, 2008

In spite of all the current volatility in commodity markets, including coffee, green prices are about where they were in our last Update. It seems because the global credit crisis had seriously hurt equity markets, new money began flowing into the commodity index funds late last year. In January and February of 2008 alone some $20-billion (US) has move into these funds.

The Commodity Futures Trading Commission (CFTC) has failed to adequately control these speculators, and rising commodity futures have made it tough for ordinary, small hedgers to manage risks. The price of rice for example has more that doubled in the past year, wheat is up 71% and corn 60%. This has put tremendous pressure on food prices everywhere, to the point of real distress, especially in the economically disadvantaged Third World. Rising costs of fertilizer inhibit the boosting of production, or must be compensated by further increased food prices.

Coffee prices have risen in spite of record world production in the 2007-2008 crop year, up from 123 million bags to 141.9 million (arabicas by nearly 15 million and robustas by 4 million). Some countries have enjoyed large increases, such as Indonesia at 38% (for those interested, Sumatra will weigh in at around 400,000 tons of coffee this year, with Java and Bali totaling around 100,000 tons).

In spite of good present production, world consumption continues to grow, especially in countries such as Russia, India and China. Some of the large speculative money is focused on the idea of world consumption outpacing production over the longer haul. With large sums of speculators' money rushing into commodities in a time of relative equilibrium between supply and demand, there doesn't seem much chance of green prices lowering in the near future.

But given this era of extreme volatility, one never knows. Stay tuned:

April 2nd, 2008

In our last update we mentioned that the market seemed to have ceased and even reversed its upward climb. That softening has continued to the point that as of this day's closing (April 2, 2008), the market on a roasted basis is around 20 cents per pound over that of last fall.

Folgers, which had issued three price rises in the past few months, now has retracted the last raise on one of its blends, possibly due to its robusta content. But for the industry as a whole, today's replacement green costs are fairly well in keeping with the 20 cents per pound most roasters have implemented. The difficulty is that these same roasters have purchased a lot of inventory at prices much higher, but may find it difficult to raise prices on a temporary basis, having to roast off these inventories at a substantial loss.

Such is the nature of the coffee business, and why we would love to see a more stable, tranquil market.

March 18th, 2008

No sooner had we "gone to press" with the last green coffee update, than we were blindsided by a sudden retraction, some falloff in green coffee prices. We had all hoped for this but were beginning to wonder just when it was going to happen. The recent run-up in prices really had little to do with the coffee market per se, but rather the unstable condition and chaos in world financial markets.

Commodities, including coffee, have been seen as a safe haven against an uncertain world economy. So it wasn't surprising that the Monday, March 17 falloff in commodities closely followed the Friday, March 14 news of the collapse of Bear Stearns Cos, the stock of which dropped to $2.00, while JPMorgan Chase swooped in to pick up the pieces and the Federal Reserve announced an emergency discount rate cut.

The flight from commodities may continue in order to raise cash to meet margin calls as US equities take a beating. And there is some concern that demand could weaken from poor economic prospects in the US. All this could mean a further decline in coffee futures. But for now at least we are hopeful that future price increases may be less onerous than had been expected.

All of this, as we have been reminding our customers, is in the end dependent on the laws of supply and demand. While some firming in coffee prices is understandable as we approach the uncertainty of the upcoming Brazilian frost season, let’s hope we are spared that happening.

March 14th, 2008

The public must be quite confused about the machinations taking place in green coffee prices. Since our last Update, the market hit a high water mark of 1.6755 (the closing on March 3/08). The green index from the July 2007 average of $1.1982 per pound had thus increased by .4773 cents per pound, or about 58 cents roasted. Mercifully some retraction has taken place from that level to today's (March 12, 11:00 a.m.) $1.5130. That would mean a more modest increase in roasted costs of around 38 cents since July.

That's good news as far as it goes, for all roasters have implemented interim price increases, including our own of 20 cents per pound at Heritage. We now watch the market closely in hope of any further downward trend, as higher cost inventories booked earlier are arriving daily, and further catch-up increases will be necessary unless there is a marked turnaround.

The latest market action could be expected as a correction was quite late in coming, following such a rapid, steady progression upwards. Some shifts in commodities in general, excepting oil, triggered stop losses by speculators, and threats that the Exchange might increase margin requirements for those speculators, some of whom have record-breaking amounts of cash involved, has had an effect.

But when we say that the fundamentals of supply and demand rule market prices, that means long-range fundamentals. For In the short run one never knows what will happen, given the enthusiasm now exhibited by those who never actually have to handle the beans.

Once again, stay tuned!

February 25th, 2008

The past week has seen the market advance a further 10 cents per pound. This reflects the unprecedented speculator interest in commodity indices, as these index traders added another 2,800 long positions, pushing the active May contract to a new high of $1.6635. This is partly taking place as a hedge against the inflation taking place in the whole economy. It is estimated that speculators now hold nearly one third of the world's total annual coffee supply. One would think from all this that the market may be overbought. If so, when do we get a break?

The main physical issues are the reluctance of roasters to fix prices in a state of disbelief at these price levels, while shippers, especially Vietnam, are still holding back in anticipation of even higher prices.

Some interesting questions arise from all of this. Among them: will higher coffee prices dampen demand? Past experience tells us that coffee has a very inflexible demand curve. People go on drinking it in spite of higher prices. But higher prices give incentive to growers to expand production. If the market breaks, how far will it go in what could be a free fall? Almost no one seems to anticipate this, but often that's just when it happens. Let's hold our hats!

February 15th, 2008

From Jan 25 to today, February 15, (9:00 a.m.), the market has risen from 1.3145 to 1.5605, nearly 25 cents per pound (US$ green). Since July 2007, when the average for that month was 1.1982, we have seen a whopping jump, 36.23 cents green, or over 43 cents per pound roasted. Prices for arabicas, along with robustas, are now at 10 year highs.

This is against a background of a low carryover in world stocks, and with world consumption to exceed production this coming year by roughly 1.8-million bags (production 123.4 million bags, consumption 125.2 million bags, per the reliable German based firm F.O. Licht's analysis). That's roughly in equilibrium, and with a better upcoming crop than had been earlier predicted by Brazilian authorities, one would assume little need for panic. Thus roasters, cautious because of all the uncertainty, seem to have been caught flat-footed, as speculators have ridden the commodity bandwagon, driving prices higher with even the slightest rumor of any shift in world economics.

All soft commodities are included, partly driven by the distortions created by the drive for ethanol production, and coffee is going along for the ride. As we have reported earlier, coffee consumption has been on the rise in many countries. That includes Russia and Eastern Europe, along with the emerging markets in Asia, and even within the producing countries such as Brazil, where sales have been rising along with their increased standard of living.

It's as if the 'specs' have, in effect, created a huge coffee company, trading in far larger lots of coffee contracts than the combined roaster community. Thus we have a classic battle between emotion (the specs with their gut feelings, reading their quasi-mystical charts), and reality (the roasters having regard for production and consumption).

This makes buying for actual roasting a tricky exercise. Stay tuned in, 'we'll keep you posted.'

January 31st, 2008

Since our last report the market has continued to be quite volatile, within a limited range. But the highs and the lows within that range continue to edge upward. Several factors are in play:

The market for robustas has reached ten year highs as the largest producer, Vietnam, seems to be holding back in anticipation of even higher prices. This of course puts pressure on arabicas as well.

Speculators and funds are driving the market. According to the Standard Chartered Bank, investment funds have some $30-billion invested in agricultural commodities, with Barclay’s Capital estimating a grand total of $175-billion in all commodities, some $40-billion higher than this time last year. There seems to be a flight to tangible assets, and coffee is one of them.

On the other hand, as we reported last time, the Brazilian government agency CONAB predicted the upcoming crop at close to 44-million bags. But more recent and likely more reliable private estimates place the figure at over 49-million bags. This is a much better indicator for our trade, as world carryover stocks are relatively low, not able to provide much of a sinking fund for world supply.

Given the current condition of world inventories, and rising consumption, especially in the coffee growing countries, we must be wary of the upcoming frost season in Brazil, beginning in late May. Fear of such an event will likely assure no serious falloff in prices before that time. Indeed, even though the fundamentals of supply and demand currently remain roughly in equilibrium, historical charts show that mid-May is very often the high point, with a gradual falling off as the Brazilian harvest and frost season play themselves out.

January 9th, 2008

Since out last report of December 3, 2007, the market as of yesterday, January 8, through narrow ups and downs, has increased by around 5 cents per pound. There are two reasons that likely have contributed to this. One is the Brazilian government's National Commodity Supply Corp. (CONAB) having predicted a shortfall in projected production for the next crop year 2008/2009, which begins with Brazil's harvest of this year's crop, May through August.

Private interests had been predicting a bumper crop of close to 50-million bags for 08/09, but CONAB places it at between 41.3 and 44.2 bags. As a general comment, we note that the Brazilian authorities almost always understate future coffee production, which has the effect of raising world prices, as speculators not actually in the coffee business take them at their word.

The second reason for strong prices may be the general trend in commodities, fueled by fears of inflation and stagnant world economies. Roasters generally seem to be short on inventories, probably fearing a general price decline that could catch them with too long a commitment.

And so it is difficult making buying decisions at the moment, but it is safe to say that it may be wise to be prudent and not to gamble by going too far out in this, an uncertain market.

2007

December 3rd, 2007

Since our last report as of November 7, the market seemed to be calm, content with the level existing at that time, but a couple of reports from non-official sources had the effect of causing it to move upward by around 4 cents per pound this week.

The report from Brazil indicated that, while sufficient rainfall in all coffee growing areas had restored ground moisture to normal levels, the hope that the problems caused by the early drought had been overcome may not be wholly accurate, as there are signs that the upcoming crop may be four million or more bags below the recent, more optimistic predictions.

That, combined with a more conservative estimate of production in Viet Nam, frightened speculators, at least temporarily. That indicates how nervous the market is right now. Fears of further sharp increases are leavened somewhat by the reality of the new crop in Latin America beginning to be shipped. Residual stocks are low, but there is an abundance of new coffee coming available.

As usual, we will keep you apprised of any new trends and conditions.

November 7th, 2007

At the time of our last posting, the fear of a continued Brazilian drought haunted the market. Throughout early October, daily reports of skimpy rainfall well into the normal rainy season drove prices steadily upward, to the high point on October 8, 18 cents (USD green) over the August 2007 average.

Since then, gradual improvements in rain coverage in the various growing areas of Brazil seemed to have a calming effect on the "non-commercials." Those are the speculators who don't touch actual coffee per se, but who have a powerful impact on the market short term, to the consternation of the roasters who tend to be more laid back, less skittish. So when the rains came, cooler heads prevailed and the market receded back to the approximate average for the month of September, but still slightly above August.

The day of this writing, news of a typhoon driving towards Viet Nam has caused a slight upward reaction. Viet Nam's main coffee is Robusta, the prices for which have been very strong, with the inevitable upward pressure this causes on Arabicas, as national retail roasters lose the normal cost savings through their robusta use, switching to some degree to lower grade arabicas that are available.

In summary, with Brazil having tiptoed through the drought scare without any serious loss, and with harvesting beginning for most arabica growing areas, we see little reason for concern. One exception is the prediction from some sources of a very significant upsurge in coffee consumption, especially for robustas, and coming from erstwhile non-coffee importing nations. Russia and China are good examples countries with a growing standard of living, which is always conducive to higher coffee consumption.

September 28th, 2007

Since out last report, the market has wobbled around, but is essentially where it was September 19, despite a one day drop on news of likely rainfall, quickly reversed when turning out to be overstated. But such rains as have begun in Brazil, while light and scattered around the various coffee growing areas, have at least started, which normally signals better precipitation to follow. We are a little surprised that this has not triggered at least some net decline.

We will watch closely for further news on Brazil and it's need for moisture for coffee flowering and development.

September 19th, 2007

Since our last Update of September 7, and essentially just over the past few days, the green market has taken off, now 15 cents (USD) higher than it was on that date. The only reason is the question in the speculators' minds, that now the frost season in Brazil is over, will there be sufficient rainfall to allow the flowering of the coffee trees.

The rainy season started around mid-September, and there has been no significant rainfall in the coffee growing areas of Brazil to date. Meteorologists foresee nothing on the horizon until at least early October. While there should be no cause for real concern until we see what happens then, the market has built in a premium just in case.

We will follow this situation closely, for if green coffee stays at this level there would have to be a general price increase to the trade. As always, we share our inventory with our customers as long as possible.

September 7th, 2007

In our last posting of August 17, the first hurricane to hit Central America had caused a rapid rise of four cents in green coffee prices, but assessment of the lack of damage caused the market to retract those four cents in a matter of days.

But then another hurricane of equal magnitude headed for an area just below the first, threatening Honduras, northern Guatemala, and southern Mexico. The market quickly jumped on that news, gaining a couple of cents, but a slight veering to the left, and the breaking of the hurricane's back against the mountains restricted the loss of coffee cherries, with the accompanying rain not causing the damage that it might have.

The market quickly settled back to where the net position for the December 2007 contract month as at 1:00 p.m. September 7, 2007, is 2.6 cents lower, at 1.1680 (USD), than the close of August 17, 2007.

August 17th, 2007

The coffee market bounced back by over four cents today on news that the Federal Reserve has lowered the rate at which it lends to banks by 1/2 a point, and as funds took profits from earlier gains to cover margin calls in their troubled equities .

In addition, the news of a strong Hurricane heading for Mexico raised some fear about damage to ports or coffee plantations. The falloff of the value of the Brazilian Real has also encouraged exporters to sell.

We will update this report as the next week unfolds.

August 16th, 2007

The trend in coffee prices has been upward, fueled by speculators, with buyers of physical coffee carefully following along so as not to be caught short of inventory. But coffee, as with the whole commodities sector, has taken a severe hit the last couple of days, with coffee losing all its gains of the past few weeks. Panic in the world financial community seems to be the main reason.

When all this cools down, just which commodities are in good supply and which ones are not will dictate future trends. Nothing much has changed in coffee fundamentals to have us expect big swings in either direction. We'll just have to sit tight and await what happens in the over all world economic situation.

Our feeling is that there is nothing at present about coffee supply/demand that warrants any big move either way. Consequently, in this uncertain situation we intend to merely replace inventories and not indulge in speculation.

August 7th, 2007

The market has risen 3.5 cents per pound (US) since our last posting July 19, and over 8 cents since July 9. This represents mostly speculative buying, while commodities in general have been weakening, with losses in energies and metals leading to a 588 point drop in the CRB index.

The slightest bit of negative news (positive, from the speculator's point of view) can send the market rising. The latest issue has been the early flowering in some Brazil growing regions throughout an unusually wet July, such flowering requiring sustained rainfall in order to develop mature beans. But with August being traditionally the driest month, there is concern that this developing stage will be aborted, in which case later rainfall will be needed to start the process of resetting the buds. Weather conditions must be ideal for this to happen.

On the one hand certified stocks continue to gradually rise in the US, while data from Brazil indicate that exports plus domestic consumption will exceed production this year. And the ICO (International Coffee Organization) puts global output of 112-million bags, but says consumption may be as high as 120-million bags. Much then depends on Brazil's next crop, in its high biennial (once every two years) mode. We note that, in the last seven years, there has been a net demand/supply deficit of around 9-million 60 kilo bags in that country.

Incidentally, a customer asked us why so much in coffee pricing depends on Brazil, if in fact Brazil is not a main source for Heritage Coffee. The answer of course is that even if we used none, we would still be caught in a world supply/demand situation that cannot help but be heavily influenced by Brazil, which on average produces around one third of world's coffee, and nearly half of its arabica variety.

More on this as we (nervously) watch the current trend.

July 19th, 2007

"The near market (September) rose nearly 5 cents (USD) from July 9 to July 19, fueled mostly by "non-commercials," those not actually in the coffee business. There seems to be no particular reason beyond some late shipping problems due to strife and resulting bottlenecks in the Colombian port of Bueneventura, and late shipments from some other origins. The weak US dollar causes coffee growing countries some stress as that means lower buying power at home.

"Cooler weather in Southern Brazil is still well below frost temperatures, and certified stocks in the US continue to rise, now at around 4.25-million bags. Of course there are always some elements in the business trying to encourage a bullish sentiment, so we will have to keep a close watch on this latest trend."

July 6th, 2007

Arabica futures have continued their gradual decline in absence of any negative news about Brazilian weather, along with quite a bit of speculative selling . Some support against this trend has come from heavy industry buying, and continued strength in robusta prices.

While this off-year Brazilian harvest will come in much below that of last year, there was an ominous announcement from FO Licht that next year (08/09) will see a bumper crop exceeding the 02/03 record of 52.4 million bags. Certified stocks of arabica have risen this week by 9,633 bags to 4,190,230 bags. Without a frost in Brazil over the next couple of months, there is probably no reason to expect an up-tick in arabica prices. Then we can all sit patiently through the following season of potential Brazilian drought.

June 25th, 2007

The market has been slightly softer since out last report of June 4, and on Friday's close (June 22), was almost 3 cents per pound lower. Much has depended on the rising cost of robustas which, as the gap with arabicas has narrowed, has created a kind of floor supporting arabica prices. This gives the large retail roasters an incentive to at least slightly increase arabica content in their blends. But after a long period of steadily rising, robustas have slipped somewhat in the past few days, probably causing, at least temporarily, the abovementioned lowering in arabicas.

Other underlying bearish conditions include a gradual rising in U.S. stocks of certified coffee, and the continuing warm weather in Brazil. On the other hand, with the upcoming year of biennial low production in Brazil, year-end stocks will be very low, a condition that would be troublesome if there were to be either a frost this summer (Brazilian winter), or a severe drought later in the year.

It is interesting to note that volume in many countries that were previously low consumers of coffee has been steadily on the rise. Much of that increased usage is soluble in form, usually meaning higher requirements for robusta coffee. And that often represents soluble production right in the countries of origin, leaving less for export.

Please stand by for future trends.

January to April imports into the USA highest since 2000, at 7.514-million bags

June 4th, 2007

The market has suddenly moved upward, and due to more than just one influence. Most important was the fear of a frost late last week causing prices to jump by 5.5 cents for the July Contract. In fact, temperatures touched the freezing point Thursday night in the southern province of Parana, but no actual crop damage was reported, though there was some fear of possible harm to next year's crop.

Parana only accounts for around 10% of Brazilian production, unlike years ago when it was a major factor. But successive frosts have forced the coffee culture to move northward nearer to the equator, where fear of frost is somewhat lessened. Minas Gerais now accounts for the largest share. But psychologically the fear of any frost anywhere in Brazil spooks the coffee world, in particular the speculators (specs), who went heavily into short covering in anticipation of possible bad news. As of last Friday's Commitment of Traders Report, they are still modestly short.

Another important factor was the Brazilian government's announcement that stocks of all coffees in Brazil (arabica, robusta, equivalent green converted to soluble, etc.), had fallen to 18-million bags from last November's count of 27 million. That's a big drop, especially in view of this year's harvest, now just underway, being the small biennial crop.

In addition, the Brazilian government has also announced what in effect is a subsidy program for coffee growers, that kept producers from selling into last week's price rally.

Given all these circumstances, one would not expect a sharp falloff in world coffee prices, at least in the short run. As always, we will keep you posted.

May 18th, 2007

The market illustrated its nervousness the past few days, with a roughly nine cent rise as a cold front approached southern Brazil. But as of today, a retraction of nearly two cents followed a less scary weather update that predicted temperatures in the mid-single digits Celsius, below frost levels.

But these longer-range forecasts can be capricious at times, so we have to keep a watchful eye on things. Meanwhile, robustas continue to be strong, putting continued pressure on national roasters, especially the retail variety.

Conditions in most of Central America are a bit dry, as rainfall is needed to encourage flowering. We will keep you posted on that situation as well.

May 11th, 2007

There is an unusual condition prevailing in the coffee market. Arabicas have been slowly receding, while robustas have been strengthening, narrowing the price gap between the two. This creates an interesting situation. The major, high volume roasters, especially the national retail variety, have traditionally employed robustas to maintain lower blend costs, relying on the principle that customers wouldn't know the difference. The long-range effect has been lower quality and receding consumption, especially on the retail side.

Imagine the dilemma for these roasters when robustas approach the cost of arabicas (in fact older arabica stocks are only marginally higher than the better robustas today). As an example, if the traditional mix has been 50/50, then the advantage of lower cost arabica is canceled by the other half of the equation, the rising price of robusta. Thus the incentive for, and advantage of, using robusta for these large roasters becomes diminished. This can cause certain anomalies. There could be a temptation to improve blends by shifting the weight to the arabica side. Some risk might be involved, however, as customers are used to the taste of their coffee, however unpleasant it might be to the connoisseur.

And, given the high volume of such companies, switching to arabicas could put upward pressure on them for normal operators such as Heritage. Public demand for the big nationals to lower retail prices gets thwarted by the fact that, while the public hears green coffee costs have become lower, the blend costs for these companies has not.

Of course the current small spread in costs between arabica and robusta would not seem quite so dramatic in a much lower overall market, and depending on the Brazil crop this summer, it's hard to predict what will happen to prices by autumn. The cause of current market unpredictability is the heavy influence of the funds, the speculators who are not actually in the coffee business, and whose concern is entirely in anticipating future price movements. Open interest is near an all-time high, but it is not the result of roaster activity. In terms of demand and supply, current world supply of coffee is adequate, but much depends on this year's crop in Brazil.

As a matter of interest, the Intercontinental Exchange (NYSE:ICE) the leading soft commodities exchange, and its subsidiary, the New York Board of Trade (NYBOT), have announced its successful launch of side-by-side trading, with over 12,000 contracts changing hands the first day. This is a convenience for the trade, though it did cost some pit jobs, given the convenience and longer hours of electronic trading.

April 25th, 2007

The market has continued on the soft side with the expiration of the May contract. The Brazilian agriculture ministry's National Commodities Supply Corp. (CONAB) has put the upcoming 2007/2008 crop at 32.1 million bags, well below this year's production, but within the expected range for next year.

The problem becomes one of other estimates of the Brazil crop coming in much higher, as the CONAB numbers are not given as much credence as one would expect from an official government agency. The USDA reports for example are considered more reliable. And, given the ample stocks of coffee in the world today, there is a pervading sense of bearishness on prices. Commodities generally have been soft, and that likely contributes to the current pessimism.

A couple of other tidbits in the news include a report from London, England, saying investors have come up with a new soap called Shower Shock that has been infused with caffeine. The company, with a website thinkgeek.com says it will "help users wake up in the morning." But if you click in on that website you may agree the whole product mix of that company is pretty frivolous.

At the same time we hear of yet another British contribution. This is a new drink called CoffeeSlender, allegedly using a "coffee-derived ingredient, Svetol." The claim is that it adds weight loss during a diet. We are told in the press release that even Miss Universe of 1990, Norwegian Mona Grudt, endorses it.

We will keep you posted on more serious market moves as we approach the Brazilian harvest.

April 10th, 2007

The market still hovers around the $1.10 mark as of this morning's writing. Fund selling at anything beneath that level triggers industry buying, creating a virtual price standoff. One influence was a bearish report out of Brazil, where Instituto Brasileiro, de Geographia e Estatistica (IGBE for short) predicts the upcoming 2007/2008 crop will be 37.5 million bags, putting pressure on the "C" market, as that is somewhat higher than earlier predictions.

As a counterpoint to this, Brazil's official government count of stocks of green coffee as at March 31 of 1.6 million bags was the lowest on record. Further news indicated that Brazil's domestic consumption will reach 17.3 million bags in 2007, as opposed to 16.3 million bags in 2006. Such rising volume of course tends to remove more and more coffee available for export.

We await something more definitive that might signal a strong move either way. We will keep you informed.

March 16th, 2007

Our last update told of a rapid 6 cent rise in early March, but since that time there has been a gradual retraction of an equal amount. The market seems to be torn between the short-term comfort of plentiful supply, and concern over possible future weather problems during Brazil's winter, beginning in May.

We had suggested in the March 2 Update that the market might move in a range from 1.10 to 1.25 (US Green), and while on March 14 it did dip to 1.0985, it has stayed within, but at the lower end of that scale. One would expect a continuation of this pattern, at least for a while.

Much publicity surrounded the recent battle between Starbucks and the government of Ethiopia over the use of the name "Sidamo." Ethiopia vehemently resisted Starbucks trying to copyright a name that included "Sidamo," one of Ethiopia's prime coffees. They seem to have won their case.

But one aspect of the conflict that held particular interest was that Starbucks would choose Sidamo, admittedly a high quality coffee grown in Southwestern Ethiopia, while seeming to miss the reality that both Ethiopian Yirgacheffes and Harrars normally bring even higher prices, all other things being equal (note that we are referring to washed Sidamos and Yirgacheffes, while Harrars, from Eastern Ethiopia, are unwashed, or "naturals)."

Apparently Starbucks executives traveled to Ethiopia to congratulate the Sidamo farmers on having "the world's best coffee." This seems to be an unusual gaffe for a company noted for its marketing acumen, if not its coffee expertise. It's always dangerous, especially in what can be largely a subjective judgement, to say one coffee is the "best" when, as in this case, more sophisticated coffee people say, through the prices they are willing to pay, that it is not. Besides, other countries may be raising their collective eyebrows too.

This is not to detract in any way the proven success of Starbucks as a marketing phenomenon. In that sense they warrant unreserved admiration. Maybe this lapse confirms the wisdom of economist Peter Drucker who, when asked when a company can become too large, simply replied, "When it becomes unmanageable."

March 2nd, 2007

We had no sooner gone to bed with our last Update than the market decided to take off. The May contract rose over six cents in two days, partly due to a general rise in commodity prices, and partly because of short coverings by the "specs," the speculators that have such an undue effect on prices. In the following few days, some fallback of those increase has taken place.

Prices for what are referred to as “Tropical Softs,” including sugar, orange juice, cocoa, and coffee, have, with the exception of coffee, been strong lately, and coffee has been fluctuating between higher highs and lower lows, giving the impression that it could break out either way. The indexed funds with huge transactions involved seem to be rolling around like loose cannons.

Concerning fundamentals, there is a lot of coffee in the world today, but concern for diminished supply of both arabicas and robustas in the upcoming few months has us all on edge. We keep mentioning conditions in Brazil because of its huge portion of the arabica market, and coffees grown elsewhere become victims of the laws of supply and demand that are so influenced by the Brazilian position.

In such a market, one is wary of making predictions by attempting to outguess the guessers. For any of our customers re-selling coffee, it may be better not to try to be a hero by going a long way out in time, but to average costs and "go with the flow."

In summary, as a reasonable guess, one might expect the market for the next while to fluctuate between 1.10 and 1.25, as future supply of coffee becomes clarified.

As an interesting aside, there has been a merger of the European ICE commodity electronic market with the NYBOT (New York Board of Trade), meaning a 14-hour trading day between the two (NYBOT-ICE). Electronic trading now surpasses that of the floor trading in New York. Functionally it really has no serious effect on roasters, but some floor traders in New York have been having to keep long hours, and some have even been terminated due to a lighter load, and in the name of efficiency.

As usual, we will keep you apprised of any serious market changes.

February 21st, 2007

The market still seems to be wondering where to go, but since our last Update it has given back almost exactly 6 cents per pound, going up and down in tiny increments, but with a gradually lower trend. There has been a lot of speculative contract selling, while an easing of physical selling from countries of origin has contributed to helping support prices. The heavy switch from March to the May contract month also has been supportive. Other commodities have been dropping, but as is often the case, coffee hasn't gone along quite in step with them.

We have around three months to go before the Brazilian frost season, and supplies seem plentiful for now. Speaking of Brazil, we see the strange spectacle of that country perhaps importing green coffee from other countries for blending to the export market, or to cover for certain shortages that might occur domestically, particularly in robustas, and most likely coming from Vietnam.

Strong promotion of coffee consumption in Brazil has boosted domestic usage by around 19% since 2003, to 16.3 million bags (69K), putting Brazil number two in the world, just behind the US. Meanwhile, a look at the long term trend in the US shows it holding steady since 2001, with 2006 imports totaling 14,057,248 bags.

The Canadian picture is quite different, with an apparent 3% annual rise in coffee importation over the same period. Tea in both countries is growing nicely, while soda has had its difficulties, and with water still being the undisputed growth champion of the past few years. The softening of the Canadian dollar against the US$ acts as an offset to the slightly lower green coffee market.

As Arnold might say, "We'll be back," with an update on any new news from the world of coffee.

January 31st, 2007

The green coffee market has been going through a rather suspenseful period where one would not be surprised if there was a sharp turn either way. The present year has been a case of very high world production exceeding consumption, which continues to rise slowly. But market uncertainty has been affected by early predictions regarding the upcoming crop that puts the decline in Brazilian output alone from this year's (2006/07) 42-million bags to as low as 32-million bags, about the same as in the last low production year in the cycle, 2005-06. It should be remembered that of those 32-million bags, 10-million will be the robusta variety, leaving what for Brazil will be a relatively small amount of arabica for export.

This is partly due to it being the lower half of the two year production cycle, and partly due to a early drought during the flowering season of October and November, in the most important growing areas of the country, Minas Gerais and Sao Paulo. Hopefully a sufficient carryover in Brazilian stocks will provide a cushion for what could otherwise be a serious shortfall.

But now the current heavy rains in Minas have created a problem of coffee rust, though no proof of crop damage from this has emerged as yet. The same heavy rainfall in the southern state of Parana has provided enough moisture to raise hopes of a big increase in the 2008-09 growing year for Parana which used to be so important to over all Brazilian production.

In sum, and as of this moment, an nervous market has still kept prices well above those of six months ago. But the uncertainty mentioned above still prevails. We will keep you posted when we can get a clearer view of the over all picture.

December 28, 2006

For some months now the market has been slowly moving higher as the coffee world has been trying to guess the long-range likelihood regarding supply and demand. There is a lot of coffee in the world at the moment, but the coming year may see a reversal of that condition. In particular, the Brazilian crop which was so abundant this year, will see a sharp drop in the coming season, perhaps by over 10-million bags. And the Vietnam yield seems not to be as promising as originally thought. A decline in world production of some 15-million bags in possible. And just yesterday we heard that Brazil is going to buy a large amount of Viet robustas, as it feels Brazil might fall short on delivery commitments in the coming year. Why would Brazil buy robustas when they may fall short in arabicas? Because the robustas would go into the domestic Brazilian market, liberating some needed arabicas for export.

Taking that into consideration against growing world consumption, the prospect of future shortages looms large, especially in the minds of the "specs," the speculators who make the market in the short run. Yesterday saw a nearly 4 cent drop in prices, but this may have been entirely due to liquidation of short positions prior to year-end, a sort of straightening up the books, so to speak.

While we can't predict the exact outcome of all this, a reversion to last year's lows is highly unlikely. And roasters are now buying at these higher prices, so will quickly have to reflect it in their selling prices.

December 13th, 2006

In spite the bearish predictions of some coffee people, the market has resisted backing off. It continues its slow, tortuous climb. Fundamentally, it is the belief that the upcoming Brazilian crop is going to be a mild disaster, limiting the amount of arabicas against a picture of slowly rising world consumption. And this is in spite of what looks like a real bumper crop coming out of Viet Nam.

With each jump in prices, usually fueled by the Funds, those holding coffee sell into it while others do a little profit taking fearful of a reversal, but it doesn't seem to deter those optimists who keep charging forward.

Meanwhile roasters, in fear of being too long in inventory, have been cautious in committing, but as those inventories shorten, the need for an imminent price increase becomes apparent. At this moment as the bulls and bears get ready to enjoy the holiday season, both sides are keeping their fingers crossed for their cause.

November 30th, 2006

As of November 30, 2006, the arabica market has been able to hold its gains as reported in our last Update. Absent a quick turnaround, increased roaster prices are expected shortly (as distinct from the increase announced by robusta oriented Folgers which announced a 15 cent per pound increase a few weeks ago strictly on the rise in robusta prices as a result of the short Viet Nam crop this year).

Brazilian origin reports insist on the idea that poor spring weather (Brazilian spring – our fall) has repressed the flowering/budding/cherry development sequence. This is alleged to be particularly so in the important growing areas of Minas Gerais. But outside of the specs, the trade remains skeptical of the idea that over all demand is about to outpace supply. It is this caution that, in absence of any new, definitive information, is likely to temper a serious further increase in green costs. But as one can never be sure in this crazy world of coffee, we will resist making any predictions.

November 15th, 2006

The market has jumped around 14 cents per pound (US Green, 19 cents Canadian roasted) in the first half of November. This in spite of the generally bearish attitude of world roasters. But, at least in the short term, money is king, and the big speculator funds have gotten the smell of profits to be made in creating this rising market.

There is some rationalizing possible to support this, such as reports of a spotty spring in Brazil; not enough rain here, too much there at the wrong time, etc., with an important growing area in South Minas Gerais especially suffering from lack of adequate moisture.

We hear of the general unhappiness in Brazil flowing from the relatively low prices of the past few years and, as mentioned by Gilmar Melles, an agronomist at Brazil's second largest coffee coop, Cooparaiso, "Either roasters have to pay more or we are in trouble." We also hear rumors of world green stocks being at a recent historically low level.

Other reports are more bullish (from the roasters' point of view). It appears, for example, that preliminary figures for this current crop year indicate production of around 122 million bags worldwide, with consumption at 117-118 million bags, making up for last year's shortfall. It may also be true that a lot of Brazilian coffee is being held back in hope of forcing higher prices, but not reflecting market realities.

The reader might note that the roasters of the world are almost always cynical of producers' reports of Armageddon just around the corner. Let's wait and see what happens over the next couple of weeks, and we are into the March 2007 contract month.

November 2nd, 2006

After moving up and down within a narrow range for some months, the market has jumped nine cents (US$) per pound in the last two weeks. In the lower ranges buyers enter the market. At higher levels origins want to sell.

This latest move has mostly been fueled by "specs," anxious to see coffee break through recent highs to a new plateau. With some publicity regarding increased world consumption, coupled with the knowledge of a drop in Brazil's upcoming off-year production, the bias may be toward the upside.

Another factor is that Fall weather roastings have of course picked up in major importing countries. But absent some other, specific, identifiable factor coming along, one would be wise not to panic But "we'll keep you posted."

October 9th, 2006

As of the close on October 9, and since our last post of September 29, a rather lazy market has drifted downward by around 3.5 cents. Lack of buyer interest and a good result from the Asian typhoon that bypassed the robusta-growing area in South Vietnam, gave the market some comfort with the long-range view.

Fairly decent rainfall in southern Brazil bodes well for the smaller biennial upcoming 2007 crop, though precipitation has been stubbornly avoiding bringing meaningful amounts to the important region of Minas Gerais.

On other coffee news, it is amusing to see a proposed class action lawsuit filed by a Seattle specialty coffee house owner who is claiming Starbucks is exercising its "monopoly power" in violation of the Sherman Antitrust Act, engaging in a range of anti-competitive activities aimed at eliminating competition.

The complaint claims that Starbucks locks out competition through a series of predatory practices such as including exclusive lease arrangements, offering to make lease payments higher than fair market value, the "cluster bombing" of stores, and competitive buyouts.

Steve Berman, attorney for independent shop owner and complainant Penny Stafford says, "We believe Starbucks' market practices are more about destroying competition than pouring a good cup of coffee."

Doesn't Berman know that "Charbucks" never was really about "pouring a good cup of coffee," only about "creating an experience?"

Another interesting item was the winning of the "Cup of Excellence" award by a woman farmer in Colombia named Edith Encisco Yasso. This Cup of Excellence program is managed by the US based non-profit Alliance for Coffee Excellence, in partnership with coffee producing countries.

It should be noted that the rather wild prices paid for small lots of these offerings of 15 to 75 bags, has little to do with their intrinsic value. To an experienced green coffee buyer, the "winning" lot might indeed be good enough to command a premium, perhaps two or three additional pennies above the "C" Contract.

But it does afford a marketing opportunity for entrepreneurial types who may pay over $20 per pound to seize on the chance to promote a name that has gained recognition through an essentially unreliable round of highly subjective "cup tests," by a handful of people whose main qualification is the time and ability to travel to exotic climes.

The month of September 2006 saw green prices for the nearest contract month of December move within an eight cent range, but wind up almost exactly where it started. The two factors most affecting the market have been the concern for lack of rainfall in coffee growing areas of Brazil, and the shortage of robustas emanating from Vietnam.

September 29th, 2006

Rainfall in Brazil has greatly improved in the past few weeks, and financing for growers has been plentiful, meaning they are in no hurry to sell. The biennial nature of Brazilian production will result in a smaller harvest next year. Along with world demand for arabica coffee holding firm, that should mitigate against a deep falloff in prices. Improved production in Vietnam should help in this, subject to some calamity such as the typhoon heading toward that country even as we write this update.

In sum, given current circumstances, there seems little reason for concern that prices will move sharply in either direction, although there may be a slight bias to the upward side. But one cannot foresee all of the complexities that can affect this business, so we will keep you posted on any surprises.

September 22nd, 2006

Since our last report the market has moved only slightly downward (about three cents in arabicas), with narrow margins between its highs and lows. It has been essentially responding to the daily weather reports out of Brazil, where the need for rain and the lack of sufficient moisture until now has kept everyone in minor suspense.

Throughout the Brazilian frost season, one is emotionally prepared to handle a two day weekend, which is a bit too short for coffee people there to manufacture grounds (pardon the expression) for coffee prices to rise.

But for some reason three day weekends are different. That extra day provides lots of time to upset the coffee world while non-Brazilians slept or enjoyed their holidays. Of course that refers to the two three day weekends in Canada and the US when the Exchange is closed in the midst of the Brazilian harvest, early July and early September.

It seems uncanny that, over the many years I have been in this business, strange things have happened after going to bed peacefully on a Friday night, only to arrive at the office on Tuesday morning after a long weekend to find the coffee world in a panic. The telephone is ringing with brokers on the line warning me that “the train is leaving the station.” That was the old days of course when we all took trains and panicked at the thought of being left behind. Today it might be, “the departure gate is closed.” Either way, the message is that we had better commit immediately to some heavy buying or be left behind by clever bargain seekers less cautious that we seem to be.

So here we are just after this Labour Day 2006 at what would normally be the end of the frost season in Brazil. But as so often has happened over the years, we arrive at our office only to hear, after “tiptoeing past the graveyard” for most of the normal Brazilian winter, which has been warm this year, that a sneaky cold front slipped in from Argentina and actually brought a mild frost in Parana in the deep south of Brazil, and the market has jumped over three cents (after a total six cent rise in the month of August). Luckily Parana is not the big growing area it used to be before the coffee culture of Brazil migrated further north, specifically due to the risk of frost. Now coffee is more heavily centered in Minas Gerais to the north.

Such is the nervous period through which it is unwise to turn one’s back, for if it isn’t a frost, it’s the potential for drought. If there is insufficient precipitation by September 15, the prospects for next year’s crop become gloomier, and the train starts pulling away from the station again. But in fact the risk of frost is now light, and readings on rainfall are fairly optimistic, so one can hope for reasonable long-range stability in prices. And in fact in this same week cooler heads prevailed, and by Thursday the market had taken back Monday’s gain.

One large element that has affected price trends this year is the rare problem of the robusta market becoming inverted because of the situation created by a shortfall in Viet Nam production. Inverted refers to a condition where the out months are being quoted far lower than the spot months because there is insufficient coffee available to meet immediate delivery requirements. Not only that, but the squeeze has driven robusta prices to the point of closing in on arabicas, causing a dilemma for the large national brand retailers. After all, how can they cheapen their blends when the most important tool, robustas, are priced inordinately high?

August 29th, 2006

For propaganda regarding the outcome of Brazilian coffee production, no one can top the Brazilians themselves in the art of wobbly prognostication. The conflicting news that is often contradictory can drive coffee buyers to distraction. A case in point is this very morning as we open our early email and see the short and long term weather reports. What is it this time? Not enough rain, too much rain, rain too early, rain too late, frost, threat of frost, or what?

In fact, less rain is not that bad during the harvest season, now nearly ended, for the simple but adequate reason that it is more comfortable picking coffee cherries when it's not raining. Besides, spotty rain coming too early before the normal rainy season causes premature flowering for next year's crop, inhibiting the full flowering expected when normal rainfall comes in September, which is Brazilian springtime.

So there is normally not much need for concern before mid-September, but the mere mentioning any day that we are going to need rain in September, and that it hasn't rained yet in August, is enough to scare the market and have it rise by perhaps two cents. Up until today, we have had mild concern, but the tone of today's example of weather reporting out of Brazil, seems starkly more ominous. Here is what we read this morning:

29 Aug 2006 21:22 DJ Dry Spell Hurts Brazil Minas 2007-08 Coffee Crop
-Survey
SAO PAULO (Dow Jones)--Brazil's No. 1 coffee-producing state of Minas Gerais will suffer a reduction in its upcoming 2007-08 coffee crop due to the worst water deficit the south of the state has experienced in the
past eight years, said the country's National Council of Coffee, or CNC,
Tuesday.

As of Monday, "the water deficit has reached 230 millimeters in the
south of Minas - which is the largest volume registered in the region
since 1998," said a CNC spokeswoman in a phone interview with Dow Jones Newswires.

Due to this water deficit, the result of an extended four-month dry spell over the country's center-south region, there is likely to be a fall-off in productivity of between 10% to 30% of potential production in the south of the state, she added.

And it's not just Minas Gerais state that has been affected. The neighboring state of Espirito Santo could also see a drop of 15% in potential productivity next season, said the spokeswoman. Meanwhile, a few regions in Parana and Sao Paulo states are also suffering from a water deficit - though there are no estimates yet for the possible crop damage that might result.

In the city of Alta Mogiana in Sao Paulo, for example, the water deficit has hit 170 millimeters. Worse yet, however, the trees have started to flower, due to showers that sprinkled the region in the past 15 days.

Flowering is an indication of the coffee tree's health. The more uniform and abundant the flowers are, the more likely the tree will produce an abundance of coffee beans. A weak flowering, however, causes panic among coffee producers, who worry that the flowers will not grow properly without good showers, which could then result in potential crop loss. "If it doesn't rain, and well, in coming weeks, these flowers could
fall off, and the tree won't bear fruit," said the spokeswoman. Parana state has also experienced flowering in limited coffee-growing
areas, she added.

Coffee is a biennial plant, with alternating years of high and low
productivity. The current 2006-07 season is a high-production year,
with an estimated 41.6 million 60-kilogram bags to be harvested, while
the upcoming season is expected to have a crop somewhere in the mid-30 million bag range.

The survey into the region's water deficit was conducted by Fundacao
Procafe, a coffee organization linked to the country's Agricultural
Ministry, with headquarters in Varginha in the south of Minas Gerais state. The CNC released the results right before the start of the three-day
Brazilian Coffee Congress Tuesday evening. Brazil is the world's largest coffee producer and exporter. Minas Gerais state accounts for roughly 40% of national production.
-By Grace Fan; Dow Jones Newswires; 55 11 3145 1489;
brazil@dowjones.com
(END) Dow Jones Newswires

August 18th, 2006

Since our last posting the market has continued to oscillate within a narrow range, with various influences tending to cancel each other out. The three key things affecting market judgements seem to be:

- the fact that the Brazilian harvest is nearing completion amid warm weather, but with some cooling off predicted for next week, with a low of 4 degrees Celsius for the southern regions of Parana and Sao Paulo, and 7 degrees for the more important Minas Gerais.

- There has been a dearth of precipitation in the major Brazilian coffee growing areas, and time is getting short regarding the proper flowering for next years crop. But typical of the confusion is the report that, as we approach this weekend, fairly decent precipitation is expected in the southern growing regions of Parana and Sao Paulo, but stopping short of Minas Gerais.

- lack of robusta coffee has brought it to a recent historical high and a narrowing of the difference between it and lower grade arabicas. This has tended to act as a support for arabica prices. In such a situation, it is reasonable to expect a correction, with either arabicas rising, or robustas falling. But it is tricky to attempt to capitalize on this as, even with the spread widening, both varieties could be rising or falling at the same time.

Some of these uncertainties may change shortly, so we will keep you on top of the coffee news

August 3rd, 2006

Quick Update: To everyone's surprise the market rose sharply amid gains for other commodity sectors, reaching a two month high. One main reason that has prevailed for some time is the rather surprising prices for robusta relative to arabicas. Robustas have reached levels they haven't seen in many years. The spread between the two varieties has been abnormally narrow, largely due to production problems lately in Viet Nam.

This latest rise in arabicas may be partly to redress that situation. Origin countries are tending to sell into these higher prices, though the market as of this writing continues to move ahead. Buy stops and short coverings in arabicas by Funds are creating an impetus, but it is difficult to guess what further movement will take place over the next few days. We will continue to report in this volatile situation.

July 31, 2006

Warm winter weather in Brazil has seen green prices slowly drift downward at roughly the halfway mark of the frost season. But in the last few days there has been a slight firming up as growers, in Brazil for example, look at long-term trends in world production and hold back stocks in anticipation of a stronger market to come

It may be interesting to note these trends in the world’s major producing areas over the past ten years. Brazil for example has been slowly but steadily expanding its exports of Arabica coffee, and we note that the quality level of its offerings has also shown some improvement. But its robusta volume has continued to suffer in competition with Viet Nam. After ascending to a high in 2002/2003, Brazil is pretty well back to its 1999/2000 level in that variety.

But if we take Brazil’s ten year over all record, we see that the pasty five years have averaged 42.26 million bags, as opposed to the previous five years production of 31.82 million bags. That’s an increase of 32.8%. These numbers do not include the roughly 20% of Brazilian production of coffee that for one reason or another has been deemed “unfit for human consumption,” much of which is now going into the production of what is called “biodiesel” fuel. This is a clean burning fuel derived from any fat or vegetable oil that will work in diesel engines. Brazil is already a leader in production of ethanol, and is now producing a growing amount of this bidiesel fuel as an additive to regular diesel, suitable for tractors and trucks on coffee cooperatives.

Meanwhile, the group roughly described as Central America, including Peru and Mexico, while holding its own the past three years is substantially down from the previous three. Comparing Brazil production this year Vs Centrals, Brazil wins easily with around 36.5 million bags, versus the Centrals yield of 16.1 million (60 kilo).

Colombia alone, by comparison, has seen production in a similar time frame vary back and forth between 8 and 12 million bags fairly consistently. As an aside, we have had some difficulty with Colombian coffee leaving the main coffee port of Buenaventura, which has been receiving much more green coffee that it can handle, causing a backup and the need to store a lot of coffee in port. This of course is in addition to the random inspections due to concern over security when the coffee enters the US or Canada.

On the consumption side, recent data on average cups-per-day consumption in the US indicates that since 1970, when it was around 2.6 cups per person per day, it has fallen to about 1.4 cups in 2006, though that figure is an improvement on the 1.1 cups just two years earlier in 2004. One can’t be blamed for being a bit skeptical about such survey numbers however, as there are so many variables it is virtually impossible to quantify things objectively through making a few phone calls, given such issues as varying cup sizes, to name just one.

Watch here for further postings as we slide through the remainder of the Brazilian frost season.

June 29, 2006

A surprise cool front entered the South Eastern coffee growing areas of Brazil amid a light drizzle of rain. This can happen at high elevations near the coast, and in southern Minas Gerais, an important coffee growing area, temperatures reached minus 2 degrees Celsius, or 28 degrees Fahrenheit on Wednesday morning.

There was no frost affecting coffee trees, and warmer weather is predicted, so there seems little fear of trouble for the next ten days or so. But just that unexpected cold snap was enough to drive the market higher on Wednesday by over two cents, before leveling off.

As a general comment, absent a Brazilian frost and the equally dangerous drought season that follows, the market shows little indication of moving higher. There has been a mild flight from commodities by funds that have had an undue influence on coffee by their speculative activities. Lower production in Viet Nam, while not affecting world arabica supply, does have an influence on prices in that large national roasters, while experiencing savings in their arabica purchases, are paying a disproportionately high price for robustas of which they are heavy users.

INTERESTING TIDBITS: Wal-Mart is moving into Fair Trade coffees that are inherently higher in price as a kind of departure from their low cost image. And coffee has received a boost from reports that it has a beneficial influence on humans whose liver might be suffering from over-indulgence of alcohol. On the minus side, we have the inevitable periodic reports about coffee's negative effect on those with acid stomach or acid reflux. Buyers should be skeptical about reports of roasters processing low acid coffee, and of course one should remember that in coffee, acidity is a prime virtue in contributing to its flavor.

June 13, 2006

The trend noted in our last update has continued, with the market drifting listlessly downward. Traders are torn between taking advantage of lower prices while nervously watching such things as weather in Brazil, and the huge number of short positions held by speculators as we approach the first notice day for ending the July contract.

These and a large number of other, less influential variables, bullish and bearish seem to be neutralizing each other at the moment. We will keep you informed at the first sign of a trend either way.

May 26, 2006

In our May 18 Update we suggested that, all considered and with no new happenings on the weather front, the market would likely drift around in a range between .95 an 1.15 in the near contract month. And that is where it is now.

Whatever changes that do take place rest on a few variables that buyers and speculators alike must watch for. In the past few days we have been hearing reports of the current Brazilian harvest being somewhat larger than predicted, perhaps by 3 million or so bags. Weather there has been warm, and the 10 day forecast is for more of the same. This has had a dampening effect on what we often get before the Memorial Day weekend when buyers and "specs" become nervous about a sudden cold front hitting the southern coffee growing areas of Brazil.

The US$ has strengthened against the Brazilian real, giving producers there more incentive to sell coffee. Commodities have been taking a hit lately, and speculators are bearish on coffee as well. So the market has slipped slowly but surely downward. Traditionally that has been the way it behaves as we all "tiptoe past the graveyard" of the Brazilian frost season. And while we see no reason to be fearful of a sudden rise, let's keep an ear tuned to the weatherman's reports.

Meanwhile, news of Starbucks entering the Brazilian market with vigor is interesting. One is reminded of the old saying, "Poor Henry Ford, with all his millions, he never got to drive a Cadillac." The modern version of this might be, "Poor Starbucks, in all their Brazilian retail stores, they can't use anything but Brazilian coffee. Oh, what the heck, customers can still get the Starbucks 'experience.'" And they can get music, and books, too.

A cold front coming in from the South Pole brought frost to the southernmost part of Brazil, lower Parana state. No coffee is grown in that area. The Brazilian coffee culture has migrated farther north over the past few decades, but the psychological effect of this frost hitting Brazil at all had the effect of pushing the market up over three cents Monday

The "sunspot factor" this year, in which the fewer sunspots might cause lower temperatures, combined with the admittedly smaller carryover of world stocks, has traders very nervous about a Brazilian frost in the upcoming winter season (it is now autumn in Brazil, and a bit early for cold temperatures).

Since our last report April 13, to the close of last Friday, April 21, the July Contract rose 6.25 cents, and since its bottom of March 22, 1.0350, about 11 cents.

While most analysts were mildly bearish up until now, the realities of a very low carryover of stocks going into the Brazilian harvest season, paired with the possibility of a frost, has everyone very nervous. There is a large, and I mean very large, risk on the upside, with little to persuade me of much on the downside. This is a bit like tiptoeing past the graveyard on Halloween night. And speaking of mysticism, some weather gurus are citing the level of sunspots being at the low end of an 11 year cycle, portending cooler weather in the southern hemisphere. Scary!

In the two weeks since our last report, the market has behaved nervously, awaiting the several reports that could affect investors’ and buyers’ perception of future trends. One such report is the usually reliable “Conab” (Brazil’s “National Commodities Supply Corp.”) report, which placed this coming year’s Brazilian production at 40.6 million 60-kilogram bags. This was about as expected, so had a neutral effect on market prices.

Another issue is the admittedly low carryover of Brazilian stocks going into the new harvest period which begins soon. While world consumption seems to be increasing, producers’ exports have been substantially lower than they were during the same period last year, off 11% between October and February, according to the ICO. But the perception is that consumer countries’ stocks were high, and the drawdown of these supplies has maintained equilibrium, thus no drop in overall inventories has taken place. Incidentally, the ICO puts 2005-06 world production at 106.56 million bags, with consumption at 117 million bags.

While within some trading days the market moved as much as 5 cents, so far in April the closing range has been from 1.0470 to 1.0975. With the first notice day coming up, much switching of May contracts to July has taken place, the difference being 2.9 cents as of today.

And so, with all of the above, and on top of the many other influences mentioned in previous Updates, can we offer any helpful advice? With burgeoning world consumption and projected production no more than keeping pace, hold your hat in case of a Brazilian frost in the next three or four months.

After an uncertain period of prices slowly drifting downward, a sudden burst of speculative interest in coffee this past week had the effect of generating a nearly five cent increase in one day.

It used to be that we had only to look at factors of supply and demand, including stocks carried over from the previous year, and to keep our eye on the next Brazilian frost or drought season. But now the market is grossly distorted, at least in the short run, by hedge fund involvement with huge amounts of money said to be approaching the $1 trillion mark at their disposal. They play the technical indicators and charts, and in some cases actually take delivery of green coffee contracts beyond the expiration date of a contract month, becoming dealers, in effect.

Since our last report the active May contract has moved within a narrow range, dropping slightly from 1.0875 to 1.0530 as of March 24. This downward drift is largely due to no news coming along of any great import, with most activity being of a speculative nature.

The Brazilian crop is maturing quite well in spite of sporadic reports of cherries with poor bean development inside due to lack of sufficient rainfall during this season, especially in the important areas of both northern and southern Minas Gerais. Coffee is a biennial product, alternating between low and high production years. While we don't yet have final estimates of this year's harvest (the Agriculture Ministry will release the new 2006/07 crop estimate on April 7), well over 40-million bags is generally expected, compared to the off-year in 2005/06 of 32.9-million bags.

And so, while supplies remain fairly tight, only a frost in Brazil would trigger a violent upsurge in prices. For while the whole Brazilian coffee culture has moved northward toward the Equator over the past few decades, a frost would have a tremendous psychological impact on the market.

In our February 20 report, we cautiously advised that, given all the variables we could see, the market was likely to hover around the then current level of $1.0945 (March 2006 Contract), possibly softening slightly. Today the market rose around 2.5 cents, with the same March contract closing at 1.0710. The last trading day for March is the 21st, when May becomes the near contract. May closed today at 1.0875. So far in March that May contract has moved within a roughly 8 cent range (1.0590 and 1.1405).

The variables among others for us to consider now are: the low carryover of Brazilian stocks by this June, the rate of drawdown in current Certified Stocks, the likely crop yield in Brazil this coming harvest, rising levels of world consumption, near-term shortage of good Arabica coffees, Brazilian currency considerations, East African drought, and the fear of a Brazilian frost. One can see that it is difficult to make predictions in such an atmosphere of confusion. But in all this circumstance, it might be safe to say there will be little serious change, with possible strengthening as we approach the Brazilian frost season.

For our readers’ interest, one trend that is taking place is the gradual decline in exports from Central America and Mexico over the past few years. Mexico is the best example where, in the period October through January each year, exports have dropped 2001/2002 to 2005/2006, from one million to 500,000 bags. So far this year the countries, in declining order of volume shipped, are: Guatemala, Honduras, Mexico, Costa Rica, Nicaragua, and El Salvador.

Since our last report in which we mentioned the February 17 March 2006 contract settling at $1.0945, the market has been oscillating up and down within a 5 cent range. It closed today, March 3, at $1.1210, some 2.15 cents per pound higher than February 17.

There have been the usual rumors of various problems in the coffee world, including one erroneous report of a huge draw-down in certified stocks that struck fear into the hearts of some traders, but essentially these rumors have canceled themselves out, and the market has reacted by staying within what may be the range for a while, - $1.10 to $1.15. Of course in a couple of weeks the March contract falls away, and we will be watching the new near contract month of May, which closed today at $1.14.

Friday of last week saw the near March coffee contract settle at exactly the same level it was the previous Monday, $1.0945. That meant on Friday recouping a 3.5 cent loss that took place during the week. It also was within a penny and a half of the same average March 2006 Contract traded last July, which was $1.1096.

At the end of trading today, February 13, a 5.6 cents fall in the market reflects the still quite long position of the Funds, along with reports of fairly decent rainfall in the key growing areas of Brazil. We will watch this closely, as when certain benchmarks of lows are broken, the chartists holding long positions can panic, causing further erosion.

Meanwhile, for a bit of diversion, an interesting piece from Reuters on February 9 titled “Ethical Brands Confuse Coffee Drinkers” illustrates some of the difficulties in the marketing of "Fair Trade" coffees. It is amusing to see the use of certain words and phrases that may or my not accurately convey their actual meaning. One example is in mentioning "ethical labels," inferring that selling coffee that is not part of the Fair Trade scheme is unethical.

Another is in the careless use of the word “demand,” a technical term in economics that hardly seems appropriate when referring to public response to a campaign appealing to our sense of altruism. Donating to a charitable cause is noble, but hardly "demanding." It is especially annoying when the organizers of the program are less motivated by charity than they are profits for themselves or for genuinely helping farmers of the Third World. Profits are good, so why be hypocritical about them?

"Consumers are now facing a growing complexity of ethical and environment claims in coffee and there is concern about confusion and declining standards," the report said. "It is also possible that certification may be another requirement for market access and a barrier for small producers."

The report looked at the Fairtrade, Rainforest Alliance, Organic, Utz Kapeh and Bird Friendly certification schemes. On the demand side, it looked at markets in the United States, Denmark, Finland and Portugal. Fairtrade focuses on giving farmers a premium to help protect them from the fluctuations of world prices. Utz Kapeh, a Netherlands-based scheme, covers good agricultural practices and worker welfare. The Rainforest Alliance, Organic and Bird Friendly certifications address environmental concerns.

The survey found that producers working with the Fairtrade organization benefited but that the impact of the other schemes was more mixed and depended on location and farmers' practices before certification. Camilla Toulmin, director of the IIED, a London-based research institute, said it was hard for smallholders to finance the extra costs involved in meeting certification requirements. More than 70 percent of global coffee production is on farms of less than 10 hectares.

Ethical labels account for less than 3 percent of the world coffee market but the launch of certified coffees by some of the world's largest roasters reflects rising consumer demand. However, the companies have tended to add a new certified brand to their portfolio and the report found little indication they planned to use certified coffee on any major scale in their established brands.

"We welcome the growing range of certified coffees offered by the big roasters but we want to see a general contribution to long-term sustainability, not a token nod," said Richard Lloyd, director-general of Consumers International. He also called on supermarkets to improve the visibility and availability of certified coffees on their shelves.

After a four month climb from September 2005 to January 2006, the market has fallen back by around 10 cents from its high of January 27. Most of this is blamed on speculative liquidation, with sell stops accelerating the down move. Hoping for even lower prices, and seeing the still large long position held by the "specs," the commercial buyers have held back on making many buying commitments

It's hard to give any wise counsel to the coffee buyer in this volatile market. In general, and in answer to the question most often posed, the advice we try to pass on to customers runs as follows:

1. When the market is at or near its historical lows, there is little harm in taking a position far out on the time horizon, depending on what facet of the coffee business you are in. The better your gross profit margins, the less risk you face by doing so. The extremes here are roasting, where margins can be miniscule, to specialty stores where they are huge (here we should concede the point that specialty experiences large operating expenses that can justify its markups whether sold by the cup or by the pound, which overshadow the cost of the coffee itself).

2. Conversely, with the market at or near its historical highs, it pays to shorten your time commitments. The key point here is that the competition, including the large retail giants, will be playing it close to the vest to avoid risk, so with their short inventories any green cost decrease will be felt immediately by them, almost surely resulting in their lowering prices, with the attendant media hype that goes along with it. If you are long in this circumstance, you will at least be embarrassed in having to explain why you cannot immediately follow suit.

In the current market, providing for reasonable coverage consistent with your ability to respond to announced increases or decreases by your competition, might be the best, if not very specific, advice.

As of this morning at 11:00 AM, the month of January has seen the March NYBOT coffee contract rise by about 17 cents per pound, and above the December 2005 average for the same March contract by over 25 cents (roughly 30 cents per pound roasted).

A continuation of this trend or just holding at this level will mean a substantial price increase in the near future. The main culprit in all this action is the funds and their perception that the current tightness in supply warrants even higher prices, as we face an uncertain future supply situation from Brazil and Viet Nam.

The market (the active contract for March delivery) rose yesterday by 3.85 cents, spurred on partly by more negative news from Viet Nam, with some reports predicting as much as a 40% falloff in this year's harvest.

In addition, stocks of green coffee in the US (Certified and "Other" stocks) have fallen by 493,000 bags in the past year, with Certifieds as of January 13 standing at 3,816,388 bags, and the over-all total at 4,666,533 bags. Open interest is at 100,000 lots, the highest since last June, indicating higher fund participation. In fact, as noted earlier, many commodities are currently seeing positive action.

The retraction that we suggested might be due in our last update did indeed take place, but it was very small and short lived. Friday's close left the market just 0.40 cents higher than the previous Monday.

An important indicator of market activity is the weekly Commitment of Trader's Report, telling us where the three categories of traders are placing their bets. These three are: the "Commercials" such as Heritage Coffee, which are actually roasting the coffee, the "Non-Commercials," that is, the commodity funds, and the smallest category, the so-called "Non-Reportables," the private investors.

As of January 10, the latest report indicates the Funds are net long at a ratio of 5 to 1, the Commercials are net short at a ratio of nearly 3 to 1, indicating the Funds are largely ignoring the long term realities of supply/demand, but rather are reading their charts and reacting almost reflexively to any news of this year's harvest coming in smaller than previously predicted. Such news was advanced through Brazilian reports early last week indicting a need for more moisture to finish coffee cherry development.

The effect of this type of information on speculators can be largely psychological, and often short-lived. But a lot of new money is going into commodities in general, and those commodities that are still trading below their historic highs are especially enticing. Ironically, unlike oil, coffee, sugar and cocoa are three such products, all of which are high on the Heritage buying roster.

We will watch carefully for a breakout to still higher ground, while trying to be prudent and realistic regarding the truth of supply versus demand. When I entered the coffee business 56 years ago, the often heard advice was to "buy on a rising market." In those days market-making specs were not around, and we the roasters were persuaded by reality and not given to looking into crystal balls.

The past three days have seen a surprising leap in green coffee prices. The current March 2006 contract is now about 23 cents per pound higher (roughly 28 cents roasted) than the level of last December 1.

The funds have taken the perception of a near-term tightness in supply and, noting that existing stocks of coffee have been drawn down substantially in the past quarter have bought heavily, and many roasters, caught short, have joined them. Some concern for lack of rain in Brazil coupled with too much precipitation in Viet Nam, and including some of the other factors we have been citing in these updates have all made their contribution.

In a surprise move, the market took a jump of around 4 cents per pound this morning. In looking for reasons, we see that the London robusta market continues to rise, probably because of bad weather news from Vietnam, the world's number two coffee producer and by far the largest producer of robusta.

Some assurance was given to the market by the updated predictions for next year's (2006/2007) harvest, which is now projected to be 124-million 60 kilogram bags, a new world record, and up from this year's projected final total of 111.4-million bags.

This is contingent upon continued favorable conditions in Brazil during the next two months of the flowering and fruit setting period. Vietnam, now the number two coffee exporter, is also headed for a big year, with a predicted 14-million bags for next year as opposed to the 12.8-million bags produced in 2005/2006.

The coffee market seems to be finishing the month of November with little price change. The prognosis for coming harvests is probably bearish, but the large drawdown of existing coffee stocks in the US, technically reducing nearby supply, has likely had a countervailing influence. The largest influence continues to be perceptions of Brazilian weather in the near future, and whether sufficient moisture will be there to maximize next year's harvest.

On news of rainfall heading for Minas Gerais, the prime coffee growing area of Brazil, today the funds "headed for the narrow door" in a stampede to get out, triggering preplanned sell orders, resulting in a drop of around seven cents per pound. This is a sign of how sensitive the "specs" are to the slightest bit of news either way. An example of a "slight bit of news" that might also "affect a spec," to coin a phrase, is that the New Orleans Folgers plant is now back in full production, despite the defection of several employees during Katrina, and the need to accommodate others in government provided house trailers.

Since our last update the market has continued to rise, with many commodity speculators re-entering the coffee market, influenced by reports indicating continued lack of rainfall in the Northern Minas and Bahia coffee growing regions of Brazil. Further strengthening of the Brazilian real (currency) vs the US dollar has made coffee interests reluctant to sell, and this has caused a rise in the differentials being paid for their coffee.

Even though it is still hoped that next year's harvest, while not up to the bumper crop levels of 2002/2003, which hit 53-million bags (60 kilos, might still be in the 45-million bag range, still large enough to allow world prices to keep from escalating. In the short run, however, given the hurricane damage to Central America and Mexico where the harvest is now taking place, we see in addition to a rising market that the differentials paid are getting higher for all arabica coffee

No sooner had the ink dried on our last update than the market jumped by seven cents from Tuesday to Thursday at 11:30 a.m. While much of this is speculators covering shorts, the immediate impetus was from Hurricane Stan, which by some estimates has lowered Mexico's upcoming harvest by from 25% to 40%, with around 130,000 hectares being more or less affected. Nearby Central American countries have also suffered varying damage. It is not so much the actual farms, but the infrastructure, particularly the myriad bridges washed out that raise concern, as the harvest has just barely begun.

The month of October saw green coffee rising by 13 cents per pound by mid-month, but back to around four cents per pound at the end. Throughout the month there was much uncertainty, on the one hand because of new hurricane damage in Nicaragua and the ongoing assessment of hurricane damage to coffee stored in New Orleans, and on the other hand the concern over lack of rainfall in the northern growing regions of Brazil, particularly in the important areas of Minas Gerais and Bahia, where early seasonal precipitation had looked promising.

But rainfall there has resumed, and together with the devaluation of Brazilian currency, the Real, the upward pressure seems to have abated, though as of today we see a small up-tick in prices. If moisture levels in Brazil can be maintained, we see no reason for a substantial rise in prices. That is not to say that there will not be a lot of volatility caused by speculators making the market for us, however briefly, for what rules in the long run is the reality of supply and demand.

The uncertainty over the disposition of green coffee stocks stored in ten New Orleans warehouses (called "stores") has had an effect on the movement of prices, at least in the short term. The industry has been awaiting the results of the New York Board of Trade inspections, as well as rulings handed down by the FDA. Six stores containing 547,000 bags (over 70-million pounds) of coffee have been allowed to maintain their licenses, but the four others remain suspended.

Nervousness over these reports, along with a bit of concern about lack of rainfall in northern coffee growing areas of Brazil, has netted out to a rise from the first of October to this date of around ten cents per pound. We quote here for your interest a report from the NYBOT on the issue, with particular reference to the coffee in the six stores with active licenses. We also remind our customers that Heritage had no coffee in New Orleans at the time of Hurricane Katrina.

"To date the Working Group and the Coffee Committee have determined that the following process will be followed in initiating an assessment of the condition of the affected stocks:

"With regard to the 547,000 bags of certified coffee in the six licensed
stores:

"Upon completion of this process, the results will be reviewed by the Working Group and the Coffee Committee before any further recommendations can be made to the Board. At this time, the Working Group hopes that it will be able to complete its review and make a recommendation regarding the deliverability of this coffee to the Coffee Committee in advance of the first notice day for the December 2005 futures contract, which is November 18, 2005. If this expectation changes at any time, a release will be promptly issued.

"With regard to the certified coffee in the four stores whose licenses have been suspended:

"The Exchange has been told that representatives from the Food and Drug Administration have indicated that any stocks that came into contact with floodwaters must be destroyed. The Exchange will closely monitor the clean-up in these stores and at such time as conditions permit the Exchange will institute procedures to assess whether the quality of remaining certified coffee continues to meet Exchange standards. It is not anticipated that this will be accomplished prior to first notice day for the December 2005 futures contract."

Yet another hurricane, originally heading in the direction of southern Mexico, has become a Category 5 storm, but if it takes the predicted path, it will make a right turn and hit land in southern Florida, perhaps moving across Miami. At first the market seemed to react to this latest threat, but has now settled back on seeing no major danger to coffee growing or storage areas. Although Miami could be affected, it is one of the lesser green storage ports.

News coming out of El Salvador this morning indicates that the coffee farms have escaped flood damage, but "most of the country's roads and bridges are blocked by massive landslides." The harvest there will be in full swing in November when hopefully the infrastructure will have sufficiently returned to normal to be able handle it.

Fundamentally nothing new has happened, as the market continued its 6 week advance yesterday, uncertain about the total results of the hurricane in Mexico and Central America, and volcano eruptions in Guatemala's Lake Atitlan area, and in El Salvador.

Beyond those three countries, the others involved with at least minor crop damage are Honduras, Nicaragua, and Costa Rica. For your interest, and to put it into perspective, here are the numbers covering coffee shipments (stated in 60 kilo bags) from those six nations, from 2000-01 through 2004-05, the coffee year being from October through the following September.

You will see that with the minor exception of one year, there has been a steady decline in shipments over the five year period, in spite of slowly expanding world consumption. It is interesting to note that the total output of these countries is about equal to that of either Colombia or Vietnam, and of course about one third of that of Brazil.

Coffee futures continued to rise on news that crop damage in Southern Mexico and Guatemala was much worse than had been anticipated. Mudslides and flooding have caused considerable damage not just to trees laden with coffee cherries, but to the infrastructure needed to successfully harvest and transport the coffee to market.

The early harvest of lower grown coffee in these regions is soon to begin, and even getting the labor needed for picking may prove difficult. Damage estimates vary, but importers heavily committed to coffees from these areas may find long delays in receiving supply.

Even within the U.S., internal transport has been difficult, with FEMA pressuring truckers to divert capacity to the relief of those in the Gulf states suffering shortages in the aftermath of the hurricanes. And, of course, free market rates in such a situation tend to give truckers the incentive to go where the best rewards can be found.

All of this considered, and allowing for nervousness and possible exaggeration following such a tragedy as we now see in Latin America, we must realize that even if predictions of a 20 to 30% diminution of production in two or three of those countries takes place, that pales into insignificance when set against the upcoming crop in Brazil. But in the intervening time before that harvest is realized, we may see a further increase in prices as the coffee world deals with the short-term interruptions of supply.

As we suggested in our previous Update, the market has indeed increased significantly, four cents per pound just today, with the hurricane that hit southern Mexico and Guatemala taking place against the background of the short-term supply/demand situation we mentioned last time. Even with a large Brazilian crop looming next year, we must remember that even with many large roasters switching from Centrals to Brazils, there is a finite limit to how much of this can be done. A shortage of good Centrals (including Mexicans) stemming from events like this last hurricane could have a bolstering effect.

In our last report we mentioned a likely firming-up of green costs for a while, given the scramble for inventories by roasters pending the bumper crop expected in Brazil beginning in May 2006. Since that bulletin the market has risen 5.55 cents for the December 2005 contract. A small bump occurred just today, probably due to the rather severe earthquake in Salvador and a hurricane hitting southern Mexico.

Adding a bit of concern to the supply/demand puzzle is Brazil now trying to sound a minor alarm in the form of reporting lower-than-needed rainfall in its northern growing regions, just when we were all beginning to feel comfortable with the general moisture conditions throughout that whole area. This will require careful watching, as next year's supply could be affected.

Conclusion: prices may be steady or even firmer for a while, but softening as spring of 2006 arrives.

It's anyone's guess, but roaster interest at these low levels may signal an end to what appeared to be a free-fall in prices. The strongest, most objective influence is the looming large crop that is likely in Brazil next year, and current levels of rainfall have made crop failure unlikely. Thus it is hard envision a strong upsurge in prices at this time.

This brings us up to the end of Thursday, September 8, 2005. It is becoming clear that the effect of Katrina on green coffee stored in New Orleans is less influential on the market than news of precipitation in the coffee-growing areas of Brazil. We don’t have final numbers as yet as to the losses in The Big Easy, and we are awaiting news of the usability of stored coffee, even that which has not been directly soaked with polluted water. It should be noted that a warehouse with walls that have withstood the hurricane winds and with floors that are sound may have had water enter through the roof, and as long as that water has not directly come in contact with the green coffee, that coffee may be perfectly okay. But any warehouse that has been penetrated with street water may see all of its coffee condemned in fear of any toxicity that may have resulted.

The trade is concerned about problems with high temperatures and humidity, inoperative cooling systems and rodents and insects in New Orleans warehouses. A typical report on storage conditions comes from Dupuy, which operates a number of coffee storage facilities licensed by the New York Board of Trade in New Orleans. It said in a letter to clients that "while we believe our office and buildings survived the initial impact of the storm, subsequent flooding may have caused some damage to stored goods. Officials are restricting anyone other than law enforcement, relief personnel, utilities and military personnel from entering parish borders at this time. We are exploring alternative avenues to allow us to enter and inspect our buildings." Meanwhile, the port of New Orleans is beginning to gradually reopen, starting later this week, according to port officials.

Procter & Gamble (Folgers Coffee) which roasts over 50% of its coffee in New Orleans, is said to control a sizable portion of all coffee stocked there which, if condemned, may cause Folgers to begin buying heavily from whatever is available for awhile, creating the possibility that futures contracts for December 2005 might draw closer to those of March 2006. There is currently around a four cent spread. Maxwell House, possibly gaining at least temporary market share from Folgers, is reported to be buying heavily to take advantage.

Against this dramatic background, we must remember that if the entire New Orleans coffee inventory, in storage warehouses, trailers en route from docks to warehouses, roasting plants, and retail stores was lost, that loss would pale into insignificance against the numbers involved in Brazil’s next year biennial larger crop. The controlling factor there is the amount of rainfall the country’s major growing areas receive over the next couple of months.

Many coffee people have been wondering what effect Hurricane Katrina would have on world coffee prices. New Orleans is home for around 27% of all green coffee stocks in the US. As of July 1, 2005, some 1.6-million bags of green coffee were stored in 5.5-million square feet of storage space there. Most of that coffee came from El Salvador, Mexico and Honduras. In total, there were 6.05-million bags in storage in the US.

In terms of world supply and demand, coffee in New Orleans represents around 1.5% of one year's total world production. As such, it wouldn't seem to be that influential on coffee prices, but the market has been very uncertain lately about the current balance of supply and demand, and any threat to supply means an influence on the upside.

Luckily on Monday the hurricane veered slightly to the east, and though eastern New Orleans was hurt badly, the area where the coffee is stored is in the west end, near the Mississippi River. The New York Board of Trade has declared force majeure, meaning that deliveries pursuant to previously issued delivery notices shall not be made until the Board determines to what extent the coffee has been damaged.

On the day of this writing, August 2, 2005, the market for arabica coffee on the NYBOT rose by around 4.5 cents (US). The reasons seem to be twofold – the five percent "decrease" in Folgers price to the retail trade, and the information from Brazil indicating that this year's harvest, which had been predicted to be 32-million bags, now may only turn out to be 30-million bags. These issues deserve a closer look.

Why would the market immediately react to the Folgers announcement the way it did? The reason is to be found in one of the basic laws of economics: the lower the price, the higher the demand. This is known as the "flexibility of the demand curve." Of course no two products have exactly the same demand curve, their response to changing prices.

Coffee is an example of a product whose demand curve is quite inflexible, not very responsive to price changes. The fact that over one third of all coffee in North America is consumed away from home contributes to this situation, as foodservice prices for a cup of coffee do not respond quickly to coffee cost changes either. At 60 cups to the pound, a 50 cent bump in coffee costs is less than one cent per cup, so there is no need to panic in an era of 75 cents and much higher per cup, retail.

The majority of trading in commodity coffee is not done by roasters, the people who actually handle the product, but by speculators, the commodity funds that have no direct concern for coffee as such, and would just as soon be dickering in oil, corn, or pork bellies. So when they see Folgers dropping prices by five percent, they remember what their college profs taught them about supply and demand. They get excited and start buying, for they assume Mr. and Mrs. Homemaker will immediately increase their personal coffee drinking habits. And all this on the same day Brazil issues a pessimistic report about coffee production. Add to that the knowledge that world consumption is rising at around one percent annually, and that consumption of everything, including coffee, is escalating in China, and traders in their excitement are likely to reach for their bottle of Valium.

As for people actually physically handling coffee, no two market segments behave the same, which confuses the public buying, depending on which segment of the coffee industry they are in. At the retail level one must realize that a roaster such as Folgers does not have to carry large inventories of green coffee to "protect" its customers, for shoppers at that level simply get hit with increased prices in retail stores almost at the moment green costs rise. Similarly, when green prices fall, that same roaster can reduce prices just as quickly, while gaining some media coverage by virtue of the announcement.

The "away from home" roaster, however, must acknowledge his customers' need for planning price changes, so traditionally provides for three or more months of inventory. Thus, price change notices from those roasters will represent a much longer lead time. This is a lot less convenient than changing prices immediately upon hearing of action in the market. For on a rising market such roasters may be running three months behind in raising prices and, likewise, on a falling market, in lowering them. Meanwhile an unthinking or unsympathetic foodservice customer, on hearing of a Folgers decease, may utter the old cliché, "What have you done for me lately?"

On the issue of Brazilian production, the current harvest is now over half in, so changes in poundage estimates at this late date are a bit surprising. And anyway one must always be a bit skeptical about the coffee news emanating from that country, where producers are not famous for their optimism about production numbers. It is not in their best interests to be so.

The coffee market entered the Brazilian frost season in May rather tentatively, with speculators (informally known as "the specs") reaching out for any sign of a tightening supply that could send prices rocketing skyward. An urgent concern over how many millibars of pressure over Argentina that were needed to push a cold front into southern Brazil became part of day-to-day conversation. As of this writing, though, despite a couple of hurricane scares and in the absence of any frost, the market has maintained its "cool," retreating somewhat from its highs.

Roasters generally had not yet reflected these recent highs in their pricing, so for them and their customers the news of some retraction is welcome. But one quite interesting development has come along through this spring's rapid rise in prices that provides an excellent illustration of the need for contingency planning in any business endeavor. And that is in the issue of so-called Fair Trade.

The reader may recall that the concept in Fair Trade was to provide the growers with $1.21 per pound for their green coffee, with the program administrators adding five cents to bring the total to $1.26. Free market world prices which had been low for some years were to be ignored so farmers could earn a "fair" return. What to do, then, when those free market prices topped the $1.26 level? Administrators of Fair Trade seemed to feel wronged by growers who were reneging on their contract commitments in favor of the much more glamorous free market prices. The result was a temporary lack of availability of Fair Trade-labeled coffee. An additional concern is that, at the high prices farmers could fetch for their product, they may have oversold, making it impossible to honor further commitments to Fair Trade, resulting in further shortages.

Other difficulties for Fair Trade involve the uncertainty of future world demand for it and the proliferation of origins from which it can be obtained, to say nothing of the mind-boggling combinations with which Fair Trade can be confused, such as organic, bird friendly, and shade grown, along with decaffeinated versions of all of them.

As for coffee prices generally, we have around six weeks of nail biting over a possible Brazilian frost, following which the only concern will be getting sufficient rainfall in Brazil's key coffee growing regions for development of next year's predicted bumper crop. Stay tuned.

Since our last report April 15 the market has oscillated up and down within a 15 cent range, responding nervously to the slightest news. But in terms of the fundamentals of supply and demand, nothing very dramatic has changed. The exception is in Robustas, the spread between that variety and Arabicas having narrowed due to dry weather conditions in Vietnam and labor shortages in Indonesia because of the tsunami at the end of 2004.

The harvest is well underway in Brazil, with crop estimates of around 35-million bags. That will bring the world total production to between 110 and 115-million bags, set against world consumption of as much as 117-million bags. This equation appears bullish but for the world carryover of green coffee stocks of an estimated 17.4-million bags, down some 10% from last year, but which should still be sufficient to hold prices steady. The predictions are, given ideal conditions, for a record crop the following year of some 48-million bags in Brazil, which will be bearish, but a frost or drought could tip the scales dramatically toward higher prices.

World consumption is increasing at the rate of around one percent per year, with particularly dramatic growth in Brazil, which may before long surpass the US in total demand. This calendar year's estimate of domestic Brazilian usage is 15.8-million bags (132 kilograms each, the world weight standard to which all countries' exports are adjusted for reporting purposes).

It's tricky trying to give an update when the green coffee market is currently so volatile. To put it in perspective, as of this writing, Friday, April 22, 2005, the near futures trading month of July on the NYBOT index closed at $1.2780, about 50 cents (US, Green) over the level of a year ago, and up five cents on the day. From a high of $1.3935 on March 15, the long awaited correction finally arrived and the market fell to $1.1410 a month later, on April 14, but as noted above has since recovered over 13 cents.

On today's "new news" front, the predicted current Brazilian harvest had been previously estimated at 32-million bags, and there was some apprehension that estimate might have been too high. But today the Brazilian government's updated number put it at 32.46 million, a good sign. In short, the supply/demand equation makes one reluctant to gamble on a wild escalation of green prices. But given the very large amount of money still pouring into commodities, we can't be too optimistic about a falloff, especially with the current nervousness during the upcoming frost season in Brazil.

So let's hold our hats for the next few months as we watch the weather forecasts emanating from that bell-weather country. Good news on that issue, and perhaps enhanced production from the rest of the coffee world resulting from the recent higher prices, and maybe we will see a return to lower prices.

Alan Greenspan called it "Irrational Exuberance." He was referring to stocks that were being bid up beyond their true, intrinsic value. This kind of exuberance is now taking place in the coffee market. Most commodities have lately been attractive, and coffee is no exception. Commodity funds have reversed field from last year's trend and bid coffee to levels well above what seems to be warranted by current market conditions of supply and demand.

Two thirds of all trading on the Coffee, Sugar, and Cocoa Exchange is done by people who are not directly involved in any operational aspect of the coffee business. Those who are directly involved make decisions on reasoned perceptions of the current and long-term supply/demand situation. But the sheer volume of the speculators' interest allows them to create a market direction independent of normal logic.

But that can only be short-term, for reality cannot be avoided in the long run. As we reported in the last bulletin, most estimates had placed likely production in the upcoming year at around 115-118 million 60 kilogram bags. But more recently we are seeing less optimistic figures, some as low as 107 million bags, only 66% of which is arabica coffee. World consumption is forecast at around 114 million bags, and that has helped fuel the speculation in this, the off-year for Brazilian production. A drop-off in world stocks already in storage this year as opposed to last has had an additional bullish impact. But with good weather in Brazil in the following year, with no frost and no drought, there is now projected a possible 50 million bags, a very bearish number.

It is true that current exports from Central America, including Mexico, are down around 8% from the previous four-year average, and this against a background of increasing world consumption. But higher prices have a way of changing such a trend, with growers able to afford proper fertilization, pesticides, pruning, and to pay pickers to ensure a complete harvest. And there will be a tendency for demand to dampen with rising end user prices.

In the past, several years of very low and steady green coffee costs have ended only after a calamity in Brazil, usually a frost, sometimes a drought. This time no such influences were brought to bear, so the roasting fraternity generally assumed the gradually rising green costs of last fall would soon be reversed. In times of prolonged low prices, the downside risks are also so low that most roasters normally take longer inventory positions. As prices began to rise late in 2004, it seemed prudent to shorten these positions in fear of a sudden reversal. The recent accelerated rise in green costs caught roasters short, so they will be raising wholesale prices substantially, on top of the more modest ones already announced.

Periods of prolonged low, stable prices always seem to create pressure on roasters’ margins through price-cutting. This creates stress on the industry. A few years ago the four largest, essentially regional foodservice roasters in the US were: Continental, Wechsler, Superior and Farmer Brothers. Today only one survives, the other three having been absorbed by Sara Lee. It is possible to predict that there will be further attrition, mostly through consolidation.

One might logically ask why roasters wouldn’t have gone even farther out in inventory commitments, given the historic lows of last year. But buying futures carries a penalty for each succeeding contract month (the contract months are March, May, July, September and December). If Roaster A goes out, say, 12 months, it would mean around an 11 cents per pound higher green price in the farthest month. That represents over 13 cents after shrinkage. If Roaster B decided to just follow a policy for the same time period of buying against the nearest month, it would have a tremendous cost advantage over Roaster A in the marketplace.

Because of its market share, an old saying goes, regarding prices, “Brazil rules.” The moment of truth may come with the advent of the Brazilian harvest beginning in May. Prices, while now relatively high when compared to the past few years, are still well below historic highs, so let’s hope for decent production numbers. With luck, the bubble could burst.

2004

Perhaps this is a good time for a market update, as we are in the dangerous Brazilian frost season. The whole picture can be very confusing for the buyer wondering just how much inventory should be provided for. Here are a few clues that may be of help, hopefully not adding to the confusion.

A far off cold front in the first week of May made buyers nervous, and the market rose 2.5 cents in a day. Then things settled down a bit and by May 17 had drifted back to barely above where it was on May 3. Then on the 18th, word of another small cold front made some people skittish, and the market bounced up again, though that cold front has gone now too.

Some of the other forces that affected the market in the last few days are, as we see it from here:

1. The BIG ONE -- Fear of a Brazilian frost, the season for which is just starting. Some people are buying for insurance. Remember that a frost would not affect this year's harvest, only the prospects for that of 2005.

2. US Stocks of green coffee last week fell a bit, surprising most people, even though stocks are still pretty high.

3. There is the fear that recent low prices have driven some farmers out of coffee, lowering future world production totals. Watch for development of that trend in crop year 2004/05.

4. These same low prices have made it difficult for some growers to properly fertilize, use pesticides, etc. This also could affect future crop yields.

5. Differentials for Colombian coffees are high as a result of low supply in the Colombian cash coffee market. Colombian coffee growers are currently picking the midyear harvest known as the "mitaca," which is smaller than usual, sparking higher prices (Colombia straddles the equator and has a main crop as well as the secondary one).

1. In terms of over-all normal demand/supply, the market likely has no reason to rise, but certain coffees are now, and will continue to be overpriced, such as Costa Ricas and Guatemalas, where at least one large specialty chain has bought a huge chunk of the harvest, driving prices up from these sources. Even though these prices are high because some people insist on the origin names, suitable substitutes can be used.

2. The speculators have largely left coffee in favor of other commodities like oil, where there is more excitement.

3. The Brazilian government is now auctioning off a million bags of green coffee to raise money to support the next crop, and this may have a small downward effect on prices at least temporarily. Parana growers are suing to have the auction canceled, but it is going forward anyhow with no market effect so far.

4. The Brazilian harvest, now ongoing, may have a higher yield than some pessimists predicted and if so, absent a frost or a drought following the frost season, there could be downward pressure on prices.

These are some of the forces at work, so one can see why there is so much uncertainty. One course of action for buyers is to be conservative in terms of buying out too far. The worst that will happen is that selling prices will have to go up in the long run anyway, if green prices should rise further.

During the week January 19 - 23, coffee prices rose 3.30 cents a pound due mainly to commodity funds adding to their long position. There was a small drop on Friday as everyone awaited the “Commitment of Traders” report that indicates which way the speculative winds are blowing. Open interest reached a new record (100,077 lots), and non-commercial traders were long 9,941 contracts, up from 6,300 contracts, indicating their perception that prices will continue to rise.

Commercial buyers, the ones that are actually dealing in real coffee and not just trading paper, were less certain of a fundamental excess of demand over supply, as indicated by their being net short 20,833 contracts (vs. 16,864 contracts).

Another indicator of the actual condition of world supply and demand is the amount of Certified Stocks on hand, which were up by 13,962 bags to 4,386,853 bags last week. This year’s Brazilian crop is expected to be larger than last year’s. That should have a bearish effect, but offsetting that may be the view that the last few years of low prices will have the eventual effect of retarding production. Growers, lacking the resources for fertilizing, pest control and irrigation, will produce less, resulting in higher prices.

One interesting trend that could affect coffee prices is the growing consumption of coffee in

China

. In spite of low wages, the savings rate among the people is, astoundingly, in excess of 20%, enabling that country to enjoy a rapid industrial growth, as opposed to the

growth rate which is retarded by its emphasis on consumption. Coffee sales should continue to reflect the growing prosperity in

China

. With its large population, it will become a significant importer of coffee, perhaps helping to take up the world’s current overproduction.

2003

The market has seen a quick retraction from its very recent highs, then it regained a penny on Wednesday, September 17. The questions are, why the sudden spurt, why for so short a time and where do we go from here?

As to the quick jump in prices, an unlikely answer is being given in some quarters that Hurricane Isabel could have headed for Central America and southern Mexico, frightening some speculators. But in fact, even if it had struck there, the possible loss of two million bags or so of production is hardly more than a drop in the bucket in world terms.

The fear of drought in Brazil was hardly a very good excuse, as precipitation there to date is quite normal, just prior to the rainy season. It may simply be the speculators and commodity funds were making the market, and when they sensed a small downturn there was a hurried "heading for the narrow door."

Given good rainfall in Brazil through November, there seems to be no fundamental reason for an advance in the market. But, as Mr. Greenspan might say, given the "irrational exuberance" of the bulls whenever they see the slightest reason for hope, one might be wise not to gamble too much in either direction.

September 11, 2003...

We have held off updating this report pending some definite trend in the market, one way or the other. The last couple of weeks have seen a definite upward move, and many customers have been inquiring as to the background and what might be expected in the future. Here then is a summary of the variables, and "your guess is as good as ours" with respect to what conclusions to draw.

First, it’s fair to say that "Brazil rules" when it comes to world prices. This is because of its dominant position as by far the largest exporting country. The market has been influenced until recently by the knowledge that world supply still outpaces demand, and by the prospect of a very large crop in the upcoming year. But prices have held because of the annual fear of frost in the coffee areas of Brazil. In addition, Brazilians have increased the differentials they are asking for their coffee, and other countries have followed suit.

A frost in Brazil’s winter (our summer) would have had a real effect, depending on its severity. But here we are in September, and the possibility of a frost has gone. Now buyers’ fears lie in a drought, which can have a serious effect on the coming crop, if the flowering of the trees in not accompanied by sufficient rainfall.

The rainy season in Brazil begins shortly, around the last week in September, and continues through November. But some tree flowering is now taking place, and along with it the psychological expectation of rain. The idea seems to be, "if the flowering is here, where is the rain?" And even though there has been some precipitation, the commodity funds that have shorted the market heavily have become very nervous at any hint of drought.

We should mention here that commodities in general have been very strong recently, including the whole foods complex. The "coffee bulls" are touting the idea of drought, while the bears dwell on the fact that the rainy season is just about to begin, so why worry? If the rains come, the surplus will build, and the prices may well give back the recent gains and recede to the levels of a year ago.

It is against this uncertain background that we either commit to taking a longer inventory position, or to abstain in hope of lower costs. Customers should also be aware that going too far out into the future carries with it an automatic penalty of 2 to 3 cents per pound for each contract month. For example, the December 2003 Exchange price closed the day of this writing at .7205, while March 2004 closed at .7440, 2.35 cents higher.

In summary, all depends on the amount of rain in the important coffee areas of Brazil over the next 10 weeks. We will try to keep you updated in all of this.

As off this writing, February 10, 2003, green coffee prices on the New York Coffee, Cocoa and Sugar Exchange have risen over mid-December levels by around 5 cents per pound. The market is jittery, and one gets the feeling that a dramatic breakout either way is possible. The current geopolitical scene along with awareness of substantially reduced production this coming year adds to the uncertainty.

In general, roasters have been skeptical, the commodity funds optimistic. Certified stocks, those coffees in the US that have been certified by the Board, have risen to around three million bags (60 kilos each). Most of these coffees are pretty tired from old age, so a substantial "differential" has to be paid for the qualities that we at Heritage, for example, need for our blends.

One has to add the differential cost to the Certified stock's price to get the net price. These differentials have narrowed somewhat lately, so while green prices are running around 20 cents per pound higher than the lows of last year, lower differentials have softened the blow a bit.

For a buyer of large coffee poundage, green or roasted, there are real risks in making the choice of how far to go out on the time horizon in terms of price commitments for future deliveries. Judgments can involve a host of variables. And what the buyer should assume in terms of risks depends on the gross margins earned in his business, and the relative ability to absorb losses within those margins.

For example, the sale of a single shot, around an ounce of espresso for $1.50, means a neat little gross profit per cup of over $1.40. It's much less for regular coffee in a restaurant selling seven ounces for 50 cents. It's even less for a wholesaler working on small margins. But consider the roaster who, if the coffee sold by the pound was sold based on the brewed yield, receives around 2 cents per cup.

Let's look at the risks involved in booking a year's supply of coffee. As of this date, a contract for delivery in May of 2004 is 13.4 cents (US) per pound higher than one purchased for March 2003 delivery. If nothing changed in the market over that time, the coffee to the long-range buyer would cost around 16 cents per pound higher on a roasted basis (30 cents higher for Canadians) than it would for the buyer who took a chance and waited.

This resembles the insurance business in a way. Buying long insures against a violent event such as a Brazilian frost sending green prices into the ionosphere. In that case, selling prices for roasted coffee would generally rise commensurately. That could mean a healthy inventory profit for the long buyer, the "speculator." Or he could opt to use his position to gain market share away from the patient one with a lot of courage who waited, thinking he could always raise his prices.

The final consumer can't do much about the market. The Specialty store, especially the low poundage, single store type, doesn't really have to worry. But for the larger buyer, such decisions require careful thought, and consideration of all the variables.

In summary, those variables include: Coffee Exchange prices in New York and London (the exchange for robusta coffee), the differentials applied to various world coffees, the exchange rate on the Canadian dollar, the exchange rate on other currencies (e.g. the Brazilian currency, the Real) against the US dollar; world supply and demand; future crop prospects in around 45 exporting countries; the world geopolitical situation; the effect of various groups such as "Fair Trade" raising prices for some coffees above free market levels; dock strikes or other political unrest in coffee producing nations, to name a few. And those variables ignore the short-term effect of speculators, especially commodity funds, making a market through their huge purchases, quite outside the normal activity of those actually in the coffee business.

In the long run everything depends on world demand, and in the long run the supply will always rise to meet it. It is the short-term adjustments between the two that cause price variations. But demand is what we in the business should be working on. Our own interests are best served by increasing the popularity of high grade coffee. That in turn will benefit the providers of coffee throughout the entire supply chain.

2002

Since our last update of October 15, 2002, Folgers has raised its price by over 30 cents per pound, reflecting the long climb in green coffee prices beginning August 15. By December 2, March 2003 futures had risen by 20 cents (green, US$). In the same report we recommended caution because of the continuing uncertainty about the market’s direction. It has been a guessing contest between the bulls and the bears. The speculators have lately been playing the part of the bulls, and on December 3, the number of net long contracts held by them (19,118), was close to the record of 19,330 set in 1994. On the other hand the hedgers, the people in the trade, were playing the part of the bears. With a surplus in world supply and no significant increase in consumption, the bears couldn’t see what all the excitement was about over in the bullpen.

In this metaphorical tug-of-war the bulls appeared to be winning, taking heart from the recent charts showing that each new low was higher than the last low, and each new high was higher than the last high. It looked to the chartists like a classic zigzag move upward. The big factor keeping everyone in suspense was the USDA report due to on Friday, December 6. That would be considered the most dependable information regarding the true status of the recently completed Brazilian harvest.

That report indicated a higher number than had been expected, 51.6 million bags. The market fell 4 cents in one day, followed by a continued but erratic decline of another seven cents. As of this writing, it has begun slowly creeping upward again (though today, December 19, it fell one cent). The coffee world is aware of the cyclical nature of Brazilian harvests, the next being the off-year.

Fast forward to the next consideration, the long-range forecast of world production next year, the 2003-04 crop. As usual, dominant Brazil again holds the key. And it is feared this past October’s dry spell will exacerbate the decline in production there. The first important report was from Conab, the Brazilian government agency for food supply. On December 19, it predicted Brazil would only produce roughly between 28 and 30 million bags, down around 40% from this year. The most productive state, Minas Gerais, is expected to bring in only half of last year’s nearly 25 million bags.

Conab hedged its predictions a bit by admitting that a more accurate assessment would come in late January, after the third flowering takes place. It is well to remember that Brazilian predictions are usually on the low side. No-one there wants to be caught hurting prices by over-stating production.

Sometimes certain market forces are at work of which most people in the North American coffee trade are not aware. One good example of what seems to be a non-coffee related issue is the fluctuating Real (Brazilian currency). If you noticed that the Brazilians were the one country complaining the least about low coffee prices, it was partly because of the huge compensating increase in the volume of production. But it was also partly due to the fact that growers sell their coffee in US$, but normally pay expenses, wages and the like, in Reals. So as the Real experienced a long decline, purchasing power at home for anyone selling his product in US dollars increased, softening the economic impact for the Brazilian coffee producer.

Now, recent Brazilian government action seems to have reversed the trend. The Real has strengthened, creating the opposite effect, meaning the coffee growers are less willing to sell. Translation: some upward pressure on the market. But there is a lot of coffee in the world right now, and absent clear signals of lower world production in the 2003-2004 year, it is hard to imagine runaway prices. Still, uncertainty on the part of professionals in the trade might mean that the best advice for amateurs is to remain very cautious.

A surprise jump in green coffee prices took place following the weekend. This reflects a growing concern that a drought in the coffee growing regions of Brazil will continue, threatening the development of coffee cherries.

In the two days of Monday, October 14 and Tuesday, October 15, the December 2002 contract rose by 12.35 cents per pound; the March 2003 contract by 12.2 cents. This represents a roughly 20 percent increase. After roasting shrinkage, this means about 15 cents in increased costs. For the interest of our Canadian customers, that computes to over 23 cents per pound roasted.

It is well to note that an over-reaction by green coffee speculators can propel the market beyond reasonable levels dictated by the laws of supply and demand. There is a good supply of green coffee in the world. But it is the perception that, with a poor Brazilian crop next year, and with lesser countries predicting a large falloff in production, the surplus years may be over.

Green coffee prices in these circumstances often overshoot the correct market level, so caution is advised in going too long in Futures.

Since our last update of June 9, 2002, which still could serve as a summary of the current market situation, the Brazilian harvest has been brought in at around 50-million 60 kilo bags. That represents about two-thirds of entire world arabica production. Thus predictions of a bumper crop were confirmed, which should ensure price stability for some time to come.

One element that deserves serious attention however is that, even with no drought in Brazil this fall, that country will fall short of this year’s output by many millions of bags. And for the first time in history as far as I know, the next ten largest arabica producing nations are all predicting a lower yield as well.

That condition should serve to dry up some of the surplus inventories responsible for stifling green coffee prices in the past few years. Only with the restoration of a balance between supply and demand can prices begin the recovery sought by producer nations. We hesitate to predict the timing of such a recovery, however.

Depending on the nature of your business and the markup over green cost you presently enjoy, by next spring, taking a longer inventory position might be the prudent thing to do. You should of course be aware that going long by twelve months puts you roughly ten cents a pound (green, US$) over the current month as the futures now stand. That means, absent a fundamental change in the market, you would be about 12 cents (roasted) over a competitor who had continued to buy spot. We will keep you posted should those fundamentals alter.

Two conflicting elements characterize the world coffee situation: overproduction on the one hand and concern for a Brazilian frost or, later on, a drought, on the other hand.

While agronomists’ reports vary as to degree, there is no doubt that the Brazilian crop now being harvested is huge by past standards. After discounting for the robusta share of this harvest (much of which is earmarked for domestic consumption), and even though the percentage of fully washed arabicas is small, the abundance of arabica naturals should continue to hold world green prices down.

Some Brazilians are taking the old, dubious attitude that "what we lose in price, we make up in volume." That principle is hard to apply to the small farmer in Central America, where some estimates indicate a 25% to 30% falloff in production.

Vietnam, the world’s Johnny-Come-Lately producer and other Bête Noir of over-production besides Brazil is, in spite of promising to cool down, actually entering the maximum productivity era for the fresh young trees planted 9 or 10 years ago. In sum, sans an agricultural calamity in Brazil, we don’t see much hope of a revival in market prices.

Ironically, with all the energy being expended by assorted social engineers such as "Fair" Traders, organic promoters and so on, growers can’t afford the fertilizers, pesticides and herbicides that can contribute to higher production and living standard. The long-range solution will be provided either by Mother Nature in the form of Brazilian frosts and droughts, or by low market prices driving the inefficient growers out of coffee production.

For those larger buyers seeking to insure against higher prices by fixing contracts with their roasters, it is important to note that differentials for good washed coffees are still high, and the farther into the future one tries to buy, the higher the market. For example, the contract for July 2003 is over 10 cents per pound higher than that of July 2002, or around 12 cents on a roasted basis. So whether through buying actual long-range contracts or by taking options, such "insurance" will have you paying well over the current market for the nearest Exchange month. But given the vagaries of future trends, it may be well worth it.

The changeover from the March contract to May saw a sudden, small spiking up of the market. But the important thing, the fundamentals of supply, are what count in the medium to long run. Here is the current situation as we see it.

There is a heavy inventory of stocks in the US, and Brazil seems to be heading for a bumper crop, comes the picking season starting in May - maybe over 40 million bags, a record by far over their previous best year.

But there is a real shortage of good Centrals, for some coffee is going unpicked due to the economics prevailing today. The differential we are now having to pay for the quality we need for our blends keeps rising. Sellers simply will not sell for less than a certain price.

Cynics say that these sellers are trying to get the most they can before a big Brazilian crop hits the market. But Brazilian output doesn’t change the availability of good Centrals, Colombians, and other quality arabica producers. If the market falls one cent per pound, the growers and shippers simply want a cent more in differential.

In effect, that means the market tends to stay the same, even if futures prices quoted on the Exchange should fall. Thus we have to buy with two markets in mind — the Futures market which traditionally tells us the value of coffee today — but now also the differentials market, which together with the Futures, sets the real price. Thus there is an element of stability in all this, for in spite of what you hear about the market falling, for example, you have to be aware that the differential demanded may run a dollar per pound or more, depending on the quality involved.

Another thing to remember is that the coffees offered by shippers to and accepted by the Board, but not yet purchased by buyers, are the so-called Certified Stocks, which remain relatively high today. These are what are traded daily on the New York Coffee, Sugar and Cocoa Exchange, thus are called "exchange grade" coffees. Some transactions on the Exchange involve the physical movement of coffee, but most are merely traded on paper between buyers and sellers of contracts.

These trades establish the prices for so-called "C" Contracts, with the resulting settled prices posted for all of us to see. The actual coffee deliverable against these contracts is in storage and of varying but low quality, some quite old and stale, and not usable in fine blends.

Prices for Exchange grade coffees pertain to five delivery months—March, May, July, September and December. Each succeeding month’s prices tend to be higher than the immediately preceding one, reflecting the costs of storage and interest. Certain unusual circumstances can cause an inversion, however, wherein the out months trade at prices lower than the near months.

2001

Things have not changed materially from our previous "Update" of March 26, 2001, but let’s see where we stand on the threshold of the Brazilian frost season. Now we will begin to hear all the stories and rumors designed to bolster a sagging market burdened by serious over production. While some of the information we will hear over the next few months may correspond to reality, much of it will be a test of the story-telling ingenuity of those who stand to gain from a recovery in green coffee prices. But the "truth will out," as only the actual conditions of supply and demand will control prices in the long run.

As of this writing, June 1, 2001, we hear that due to earlier rain activity in Brazil, the blossoms on the coffee trees are budding prematurely, with the future danger of their falling off the trees, threatening the next year’s potential crop yield. This story sent the market up by 3/4 of a cent on Friday, June 1 (note: the best time to plant a rumor or story is just before a weekend, especially a long weekend with no Exchange trading, as dealers dislike going to bed Friday nights wondering where the market will be Monday morning. They might panic and do some Friday buying at news of a cold front moving in from Argentina).

On the other hand weather watchers note that the long range forecast is for the mid to high teens (degrees Celsius) in Brazilian coffee growing regions, so any frost danger has been pushed farther out on the horizon. But that horizon could be reached by the weekend of June 9 and 10 when it is predicted that colder weather might arrive in southern Brazil, moving gradually northward through the coffee growing regions.

It should be remembered that the southern areas, where the temperature will of course be lowest, is not as important to coffee production as it used to be, for the Brazilian coffee culture has, over the past several years of successive frosts, moved farther north.

While several countries are arguing the feasibility of destroying excess quantities of lower grade coffee to decrease world oversupply while trying to accent quality, there is much cynicism about the success of such a plan. Meanwhile it is predicted that Vietnam, a Johnny-come-lately to the coffee growing business, but already the world’s second largest producer ahead of Colombia, will be producing a whopping 13-million bags in the coming crop year.

As mentioned in our March Update, in spite of nominally lower green coffee costs as reflected in the "C" Contract on the New York Coffee, Sugar and Cocoa Exchange, roasters are finding that the actual costs of their green purchases are subject to growing differentials over those published numbers, especially for the high grade coffees we require to maintain our blends.

Heritage will keep you informed of any and all changes as they appear, for as noted above, nothing in this business is worse than a surprise announcement that catches one off guard, such as a severe Brazilian frost that drives the price up a couple of dollars a pound almost overnight. That of course is only slightly more unnerving than a slowly developing drought in Brazil in the months following the frost season.

The pattern has become familiar: every possible attempt by coffee growing countries to push the market up has met with failure. The problem is the same old one—supply exceeds demand. World stocks are very high and have grown again this last month. A frost in Brazil in their coming winter (June through August) would drive prices higher, but it might be largely psychological as the whole coffee growing culture in Brazil has gravitated northward towards the equator, away from the danger zone.

The differentials we now have to pay for quality coffee are rising, as exporters of such coffee will not sell otherwise. The “differential” is the premium over the “C” Contract, the price quoted for “Exchange Grade” coffee on the New York Board of Trade’s Coffee, Sugar and Cocoa Exchange, the figures one sees in the papers.

Thus we have the irony of higher differentials when Exchange prices are low, and lower differentials when prices are higher. And a country that has a built-in tradition of high quality coffee but is experiencing a current shortage of supply—as with Kenya this year—can play a cat and mouse game, with differentials quoted this week ranging from 70 cents to $1.00 per pound over the “C” price for Kenya AA’s.

Some countries are complaining they can’t afford to pay workers to pick the cherries, so a lot of coffee may rot on the ground, causing problems of decaying trees. Further, they can’t afford the fertilizer, pesticides and herbicides necessary to enhance quality and production. Within a couple of years, if world production has fallen sufficiently, prices will rise but some nations such as Vietnam keep on boosting production to gain bigger market share.

Conclusion? For the rest of this year, absent a Brazilian frost, the market should remain around current levels, following the patterns we have seen this past year, little bumps followed by immediate retractions.

There has been little change in the world supply/demand situation from the previous update on December 1, 2000 (see below).

The Association of Coffee Producing Countries (ACPC for short), is trying desperately to hold together their "retention plan" that asks each signatory nation to withhold an amount of coffee equal to 20% of the coffee it exports. The difficulty in controlling and auditing such a scheme make us wonder if the plan can hold together.

The 14 ACPC countries are Angola, Brazil, Colombia, Costa Rica, Congo, El Salvador, India, Indonesia, Ivory Coast, Kenya, Tanzania, Togo, Uganda, Venezuela, with non-member signatories of Vietnam, Nicaragua, Mexico, Guatemala and Honduras assuring ACPC that they will cooperate. These 19 countries produce most of the world’s coffee.

Central American members and Mexico favor a scheme that would involve removing low grade coffee from the export market. Other countries are trying to increase domestic consumption to relieve the surplus. But many coffee growing nations are suffering mightily from either economic hardship brought on by low coffee prices and/or serious political strife. That should eventually cut production.

World demand will not change dramatically, so the problem rests on the supply side. The main culprit in oversupply is Vietnam, which has come from nowhere to be the third largest coffee growing country in the world, replacing Indonesia, and even threatening to move into second place ahead of Colombia. Most of their production is of the robusta variety used mainly in national branded retail coffees, but nonetheless contributes to the glut in overall world supply.

The current condition of lower prices for growers inevitably leads to lower quality through poor field husbandry. This in turn creates the irony of higher differentials for good quality green coffee (differentials are the premiums we have to pay over the daily "C" Contract prices quoted on the New York Coffee, Sugar and Cocoa Exchange).

The Bottom Line— Short-term, we don’t expect much change in green costs unless Brazil experiences a frost this coming season, or a drought later in the fall. If neither happens, current economic conditions in most coffee growing countries will mitigate towards lower production and somewhat higher prices in the long run. How long? Perhaps, like an inclined plane, rising slowly to that level where supply and demand are in equilibrium, and at a level where prices are at least above the intrinsic cost of production.

2000

December 1, 2000…

In spite of earlier fear of a drought in Brazil, rainfall there should have been sufficient to allay any fears of a real future shortage of coffee emanating from that country for the coming crop year. But while no-one seems to see any reason for world supply not to keep outstripping demand, some people in Brazil have lately been trying to convince us that the earlier spotty frosts and lack of rainfall hurt this coming year’s crop to a much greater extent than previously thought. True? Let’s wait for more reliable reports before we panic.

High quality coffee will continue to bring solid differentials over the "C" Contract, but it should be safe for the buyer to relax in terms of having to worry about a sharp turnaround in the broader market at least until next May/June with the usual fear of a looming frost.

The "Retention Plan" under which several coffee growing countries agreed to hold back an amount of coffee equivalent to 20% of that which they ship was supposed to make a difference, but so far supplies in many countries of origin seem sufficient to provide a cushion, though financing of a held-back inventory is creating difficulties in countries such as Mexico, where farmers are asking their government for $350-million for support.

While the cost of producing coffee varies from country to country, it is widely held that in general coffee is being sold below its intrinsic cost. That being so, one has to wonder why, when an importer books coffee in December 2000 for delivery next December, the producer would price it below the cost of production. In a way he is paying the buyer to buy the coffee below its cost, which sounds strange indeed.

There are many countries suffering great difficulties, with political strife being the major factor. In Colombia, where left- and right-wing elements vie for control over the drug trade, the US government is pouring in massive aid as part of its "War on Drugs." Peru, counted on by many roasters for quality coffee prior to the new crop offerings from Central America and Mexico, has trouble meeting shipping deadlines, and Kenya, to which the world traditionally looks for fine coffee has seen production cut to around a third of traditional levels, mostly because of bureaucratic chicanery, and where it is reported that the poor coffee farmers may take as much as the equivalent of three cents per pound for their coffee cherries.

In fact the difficulties in coffee growing countries around the world are so numerous that space doesn’t allow us more elaboration. But if the reader wishes any detailed information on one or more of these places, please feel free to contact us. The handiest method might be by e-mailing: stuart@heritage-coffee.com

The Heritage Coffee Company, Ltd.
Coffee Roasters for Office Coffee, Vending, Foodservice and Specialty

Green Coffee Market News
by Stuart Daw

2004

2003

2002

2001

2000

December 1, 2000…

The Heritage Coffee Company, Ltd. Coffee Roasters for Office Coffee, Vending, Foodservice and Specialty

Green Coffee Market News by Stuart Daw

2004

2003

2002

2001

2000

December 1, 2000…

The Heritage Coffee Company, Ltd.
Coffee Roasters for Office Coffee, Vending, Foodservice and Specialty

Green Coffee Market News
by Stuart Daw