Robusta is beating arabica for the first time in four years as roasters use more of the cheaper grade and farmers reap fewer beans in Vietnam, the top grower.
While robusta, used in espresso and instant coffee, typically costs less than the arabica used to make specialty drinks by retailers including Starbucks Corp. (SBUX), its discount has narrowed to 74 cents a pound, from 145 cents at the end of 2011. The spread will contract to 55 cents by the end of the year, the lowest since July 2009, as demand increased to a record, the average of 10 trader estimates compiled by Bloomberg shows.
Roasters used more robusta to control prices as arabica surged to a 14-year high in May 2011 after the smallest Colombian harvest since 1976 and reduced output from Brazil, the biggest supplier. Even after falling 26 percent this year, arabica is still more expensive than robusta and is the worst- performing commodity tracked by Bloomberg. Retailers are reluctant to change the taste of their products again so soon in the $75.5 billion global market.
“We have additional demand the market has to cater for and roasters are unlikely to shift back to arabica,” said Kona Haque, an analyst at Macquarie Group Ltd. in London who has followed agricultural markets for 14 years. “A smaller crop in Vietnam is very bullish for robusta prices.”
Robusta’s Rally
Robusta rose 14 percent to $2,055 a metric ton (93 cents a pound) this year on NYSE Liffe in London as arabica declined to $1.67 a pound ($3,674 a ton) on ICE Futures U.S. in New York after Brazil’s government forecast a record crop for this year. The Standard & Poor’s GSCI gauge of 24 commodities added 3.4 percent and the MSCI All-Country World Index of equities gained 8.1 percent. Treasuries returned 2.1 percent, a Bank of America Corp. index (MXWD) shows.
The slump in arabica is already spurring some companies to cut retail costs. JMSmucker Co., which owns the Folgers brand, lowered retail prices in May by about 6 percent. Futures have declined another 6.4 percent since then. Smucker anticipates lower coffee costs for the remainder of the year, President and Chief Operating Officer Vincent C. Byrd said on a conference call with analysts Aug. 17.
As much as 2 million bags, each weighing 60 kilograms (132 pounds), of the 5.5 million bags of additional robusta demand this year came from roasters switching varieties, according to Holland Capital LLP, a London-based agricultural investment company founded in 2011.
Vietnam Shipments
Vietnamese production may drop 10 percent to about 21.7 million bags in the 12 months starting Oct. 1, from a record 24.2 million, according to the median in a survey of as many as 10 traders, growers and shippers this month.
The weight of last year’s crop on trees weakened older branches, obliging farmers to prune them. That means production will decline this year, said Le Tien Hung, the Dak Lak-based deputy general director of Sept. 2nd Import-Export Co., the country’s fourth-biggest exporter.
Additional robusta demand also came from arabica-producing nations, which imported cheaper beans for consumers and exported more of the costlier variety, according to Euan Mann, a partner at Holland Capital. Shipments from Vietnam to Mexico, the third- biggest source of arabica in stockpiles monitored by ICE Futures U.S., more than doubled from October through June, data from the General Statistics Office in Hanoi compiled by Bloomberg show.
Arabica Glut
The glut of arabica may diminish because the next harvest in Brazil will be the smaller one of the two-year growth cycle. Coffee production in Brazil dropped to 43.5 million bags in 2011-12 from 48.1 million bags in 2010-11, according to Conab, the Brazilian agriculture ministry’s crop forecasting agency.
While robusta is taking a larger share of the increase in demand for coffee, overall consumption growth is slowing. It expanded 0.5 percent last year, below the past decade’s average of 2.5 percent, according to the London-based International Coffee Organization, which has 43 member countries.
Sales in Spain fell 2.6 percent in 2011 and in Italy retreated 1.6 percent, ICO data show. Retail prices rose 16 percent in both countries, according to the ICO. Consumers in countries including Portugal, Greece, Belgium and Spain are drinking more at home, said Michael Schaefer, the head of consumer foodservice at Euromonitor International Ltd., a London-based researcher. A grande latte at Starbucks in London costs 2.50 pounds ($3.96), about the same price as a 200-gram (0.44-pound) jar of own-brand instant coffee at Tesco Plc, the world’s third-largest retailer.
Source: businessweek.com/news/2012-08-27/robusta-coffee-beats-arabica-as-folgers-cut-prices-commodities
