COFFEE MARKET SLOW TO IMPROVE

COFFEE MARKET SLOW TO IMPROVE

Suspension of the International Coffee Agreement three years ago has led to a price slump that shows no signs of abating.

With worldwide producers flooding the market, traders and analysts advise that, barring natural or political disasters in producer nations or the long shot of the International Coffee Organization agreeing a price-support mechanism, values on both the arabica and robusta markets will continue to fall.Same Old Story

the same old story for yet another year," said one analyst with a large U.K.-based trade house. "Surplus production, stagnant consumption, huge stocks in the hands of consumers, and an unwillingness on the part of producers to scale back production voluntarily."

Coffee has racked up surpluses since time immemorial, and no small surpluses such as those of sugar or cocoa. In its first forecast of 1991-92 world production last November, German statistician F.O. Licht put the current crop at 97.963 million 60-kilogram bags, up 5.6 percent from 92.774 million in 1990-91. Arabica production was predicted at 70.915 million bags, up from 66.661 in the previous year, with robustas at a minimum of 27.048, up from a minimum of 26.113 in 1990-91.

United Kingdom trade house E.D. & F. Man forecasts consumption in 1992 at around 1.4 million bags per week, giving a world consumption total of 73 million to 74 million bags, a marginal decline from 1990-91.

So in addition to the almost 80 million bags currently held in world stocks - nearly 17 million by consumers - the market is faced with yet another surplus this year, of around 24 million bags, and the prospect of a continuing fall in consumption.

"The decline in consumption is coming from two principal areas," one U.K. analyst said. "We expected to see a sharp drop-off in the former U.S.S.R. and Eastern Europe, and we got it. We're putting C.I.S. consumption in 1992 at 1 million bags, down from 2 million the previous year. Their currency problems are well documented, and that accounts for the fall.

Unexpected US Decline

we have had an unexpected decline is in U.S. consumption," the analyst said. ''There are several explanations for this, with mild winters for the past couple of years at the top of the list. But when the world's largest consumer shows a decline, it is not constructive for the market as a whole."

So the pattern of oversupply and low prices that began in 1989 looks like an instant replay, at least for another year.

"Over the next couple of months, at least until the expiration of March New York futures contracts, we will continue to see the market move lower," one U.K. broker said. "Everyone you talk to is bearish - and many see a 2- to 5-cent drop, down to 70 cents per pound or less. Some are saying producer costs are 65 cents to 68 cents, but others believe they are higher than that, so any moves that low would put very serious strains on growers, shaking some out of the market and eventually tightening supplies.

"The lower the price gets, however, the more roaster interest will improve," the broker continued. "Once we hit the lows - whatever they turn out to be - then I am looking for a 10 percent to 15 percent rally, but no more.

"I think the range for the year - without any ICO change of heart - would seem to be 70 cents to 85 cents per pound, all being the same - no weather disasters, revolutions, that sort of thing. But the lower end of the range looks like more of a possibility," the broker concluded.

His opinions are almost universal throughout the trade.

"1992 will be an extremely difficult year - there was disaster and mayhem in 1991 and I don't think it's over," one trader said. "The market in general has been going through a hard time - it's shrinking, there's less business and more players in financial difficulty - at 75 cents a pound who can cover overhead anyway?

"To sum it up, I see a narrow-range market, not very high prices, and a loss of more players as overheads are cut," the trader said. "However, those players that can weather the tough year, cut their costs and keep their heads down, will be in a stronger position in 1993 when the market starts to turn up, as I believe it must, much as is happening with cocoa."

The comparison to the cocoa market is widely used. Many players believe - or at least want to believe - that low coffee prices will end up having the same effect as low cocoa prices did for that market, namely to shake a number of producers out of the market, thereby tightening supply and achieving the price increase that would accompany such a development.

However, other sources tend to take a more skeptical view of that possibility. "Sure, it sounds good on paper, but the main difference between coffee and cocoa is that you have not had the same growth in consumption," said Peter Greenhalgh, an analyst for Landell Mills. "You have an annual coffee consumption growth of 1 percent to 2 percent at the most, while cocoa consumption has been growing at 4 percent to 5 percent per year."

''It is very difficult to be optimistic at all about coffee," Mr. Greenhalgh said. "The market has found its own level, and there is no reason for us not to stay around here until there is an alteration in the fundamentals. The question is when it will come off this level. I can't see anything happening until midyear at the earliest - when the new Brazilian crop comes in."

The new (1992-93) Brazilian crop glows like a beacon in the distance to traders who are suffering through the market's current malaise. Because of extremely hot, dry weather last fall, the flowering of the new crop in Brazil was affected, and traders and analysts believe the new crop will be greatly reduced.

The question then becomes by how much. "Our Brazil crop reports are giving us a figure of around 22 million bags for the new crop," one trader said. "I wish I could be convinced of 16 million, but I can't."