Coffee futures may spike next year because of a looming shortage of green coffee beans caused by growing consumer demand coupled with an off year in Brazil's biennial crop cycle.
Still, coffee traders have not yet priced in the risk of a deficit, reducing the probability that roasters will soon raise their list prices, which are used as a measure for setting prices for coffee shipped to supermarkets and store chains.
"I expect a supply problem, maybe even a supply crisis will hit us in the course of 2007, and it will not be over with for two years beyond," said Roland Veit, president of Paragon Coffee Trading Co in New York.
"While I, and almost everyone else I know in the coffee business kind of agrees with this scenario, it is too early for the market to react," said Veit, who started his coffee career in 1972 as a commodities buyer for Nestle in Switzerland.
The International Coffee Organisation expects world production in the 2006/07 season to reach 120 million 60-kg bags, up from about 107 million bags the previous season, thanks in large part to top coffee grower Brazil.
That's the good news. The trouble is that carryover stocks are low, consumption is rising and the coffee harvest in Brazil, which annually produces between 30-40 percent of world output, is based on a biennial cycle.
Brazilian coffee officials put the 2006/07 (July/June) crop at 40.62 million 60-kg bags, up 23 percent from the previous season due to an uptrend in arabica's biennial crop cycle. But the country's 2007/08 harvest could drop to about 37 million bags, according to a Reuters poll earlier this month.
Global coffee consumption in 2006 is forecast between 118 and 123 million bags. And future supply may not be enough to cover growing demand fuelled largely by emerging coffee markets in Asia and eastern Europe, as well as in producing countries.
"The demand side of the equation is shifting, and in two or three years you can really see global demand change," said James Cordier, president of Liberty Trading Group, a Florida-based commodity brokerage.
Veit expects the nearby coffee futures contract listed in New York to continue to trade between $1.05-$1.20 per pound during the next few months, unless bad weather - frost or drought - damages crops in large growing countries.
The last major frost in Brazil was in 1994, when the New York Board of Trade's nearby coffee futures contract had surged above $2 a lb.
June, July and August are Brazil's coldest months, though the South American country has seen only three significant crop-damaging frosts in the past 22 years. "If we get to the end of August with no frost, there may be some pressure (on the market), but in general fundamentals favour an uptrend in prices in the last few months of 2006 - due to an anticipated 2007/08 world production deficit," said Andrea Thompson, a UK-based analyst at CoffeeNetwork.
So long as NYBOT's nearby futures price fluctuates between $1.05 and $1.20 per pound, roasters may not have to adjust their list prices, analysts said.
The last time the companies adjusted their list prices for those brands was in August 2005, when sustained weakness in coffee futures prompted a 5 percent decrease in the list price for a 13-ounce equivalent can.
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