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Good Morning,

Armenia was well-represented at last week’s National Coffee Association convention in Atlanta by John Randall, Dave Joelson, and John Coyne. It was great to see so many old friends and business partners and we’re already looking forward to doing it again next month in Boston at the SCA!

We were expecting to hear a lot of gloom and doom about the market’s prospects and we were not mistaken in this regard although there are perhaps a few bright spots on the horizon, if you can call the negative impact of low prices on production a “bright spot.” Foremost, Brazil continues to produce incredible quantities of coffee and for the world’s most efficient coffee producer, their low cost of production combined with the weakness of the currency continues to make coffee a good investment. The most efficient producers there are still making profits of over Reis 100 per bag even at today’s prices. Coffee trees are being refurbished at a high rate and most seem to agree that the old “on cycle – off cycle” of production is much less today than in the past. The upcoming crop while lower than the previous will be big.

Colombia in contrast is in a lot of trouble and an impassioned appeal by the FNC for help on prices left a bit of an air of desperation. Despite their best efforts to improve productivity, they make the cost of production about 140+ cents/lb green on the farm, which is well above what the market is willing to pay today. Lacking the large flat geography of Brazil, even though Colombia has improved production from 10 bags to close to 19 bags per hectare in the past decade, they will always lag Brazil (where we have been hearing that 45 bags/hectare is not uncommon though the average is lower). The other producers of washed arabica in Central America for example are much closer to Colombia’s costs than Brazil’s, and none of these countries are benefitting from the magic of currency deflation the way Brazil is.

Overall, most of the prognosticators are calling for a small deficit in coffee next year as rising demand and falling Brazil production compared to this year push us from a surplus to a small deficit. As one banking analyst’s numbers indicate, and using a 57.5 Million Brazil crop, the world would be in deficit by 2 million bags. So our mental model going forward, rounding things off a bit, is that if the world has 60 million bags out of Brazil next year, we will be approximately in balance; less than 60 is a deficit, more a surplus. Not to scare anybody too much but we have been hearing that as a consequence of the unusual rain pattern in Brazil this year, a small amount of arabica cherries for next year’s harvest are coming to market ALREADY from Parana and Zona da Mata, several months ahead of schedule; if it’s true that a big crop is an early crop, this is an ominous sign.

Is there any hope? As was pointed out by one ag economist on the roaster side, the stocks to use ratio worldwide while adequate is comparable to where it was in 2011 when the market exploded to the upside. Although he is concerned that the potential for dollar strength could undermine any market rally, this ratio is probably the one key fundamental of all commodity economics. We don’t want to overstate the case, and we recognize that any statistic that incorporates producer stocks should be viewed with some skepticism but know that if the market starts to regain its footing, there may be some fundamental reason for optimism.

What does it all mean? Of course as many like to say, if we knew which way the market was going, we wouldn’t bother trading coffee or writing emails. But it is very clear that the premium for washed arabica coffee relative to natural arabica coffee from Brazil will have to remain wide and probably get wider in many instances. Where ICE Coffee futures may fall out in that range, which is another way of asking what value does the ICE represent, is an ongoing discussion that has been going on probably since the old Coffee ‘C’ contract was first introduced and we’re not going to solve it here and now. Just know that those who want those top coffees expensively cultivated should be prepared to pay a premium to other kinds of coffees in order to cover that cost; whether we call that “differential” or just “price” will work itself out.


The Armenia Team