Issue link: https://read.dmtmag.com/i/581281
32 STiR tea & coffee industry international / Issue 5, 2015 (October/November) Modern Coffee Trading Demand is outpacing supply and there is tremendous variance in production estimates. Extreme volatility is the norm for weary traders and current prices discourage planting. S Tools of the trade peculators got clobbered in August. It was the first time since Febru- ary that the big hedge funds had been long on arabica. A net long means that the number of positions which benefit when prices rise greatly outnumbered short bets, an indication of bullish sentiment. "Speculators enthusiasm proved misjudged as front month arabica prices fell 4%," according to Bloomberg. Prices continued their plunge to a 19-month low. By September futures were on the rise again thanks to a decision by Bra- zil's central bank to shore up the Brazilian real after falling 50% to a record low of 4.25 reais per dollar. In contrast, during 2014 coffee was the world's best performing commodity as prices soared by 49%. The 15-month global commodities free fall has made 2015 a nightmare for traders with the World Bank predicting markets will hit rock bottom in the second half of 2015 before rising in 2016. The Bloomberg Commodities Index has dropped 50 % since its 2011 high making commodities the year's worst-performing asset class. The boom cycle is over. Rising demand However, the fundamentals driving coffee are far different than most com- modities where demand is slack. The International Coffee Organization (ICO) projects a 25% increase in consumption during the next five years. The expanding middle class in China and India as well as domestic mar- kets in Brazil and Colombia are drinking coffee like never before. Economists label the seemingly inexhaustible demand for coffee "inelastic." Economist Julio Sera, senior risk management consultant at INTL FC Stone, explains that mar- ket volatility arises for many reasons foremost of which is "supply/demand disequilibrium." In a presentation on the Economics of Coffee to the National Coffee Association last year Sera said that much of the uncertainty (aside from El Niño weather conditions, crop disease, and cur- rency fluctuations) arises from a high variance in estimates of global production. He illustrated his point with 17 different esti- mates from reputable sources that vary by millions of 60-kilo sacks. Commodity traders learn to accommodate many variables but setting prices and meeting de- mand is greatly complicated when neither buyers or sellers can accurately predict supply. Dwindling inventories ICO predicts a rebound of 6.4 million bags for the 2015/16 harvest but issued a note of caution this summer as consumption is expected to reach re- cord quantities drawing inventories to their lowest level in several years. The Brazilian export agency Conab reports private stocks in Brazil, which has the largest re- serve, are less than 15 million bags. Coffee exports are down 5% for the year with prices averaging $1.21 a pound for August. ICO warned that warehouse levels in most producing countries are waning and will not be sufficient to cover production shortfalls. With an eye to the weather as the strongest El Niño since 1950 develops, ICO said that if produc- tion fails to meet expectations the market could be highly susceptible to a rapid surge in prices, as was the case in March 2014 and early 2011. Legacy traders European coffee traders with a century or more perspective like Volkart Brothers (Volcafe Group) and Bernard Rothfos (acquired by Neumann Kaf- fee Gruppe) reap the benefits of relationships and infrastructure improvements at origin dating to the colonial period. They dominate the trade. NKG and Volcafe Group combined serve about 25% of the global coffee industry. Conser- vation of biodiversity in coffee growing regions and the export business are perfectly compatible. ECOM Agroindustrial Corp. founded in 1935, completes the list of the world's top three coffee merchants. The Sao Paulo-based firm is one of the largest coffee millers with 50 offices and earnings greater than $4 billion. ECOM handles more than 12 million bags of coffee annually. "The long established, traditional traders are firmly integrated into origins with heavy invest- ments into milling-assets and storage-facilities in producing countries," observes Wolfgang Heinricy, By Dan Bolton