Coffee Prices in London Tumble to a Nine-Year Low

(Bloomberg) -- The coffee market is looking increasingly bleak.

While robusta futures rose on Tuesday, the gain followed the biggest daily slump in four months that sent prices to the lowest since 2010. The beans, favored for instant drinks, have been pressured by a glut of coffee and money managers have never been so bearish.

As well as a global surplus, a weaker real has made coffee exports from key producer Brazil more attractive and flowering there is looking good. That’s helped put robusta and arabica on course for a third straight annual decline. The rout has made production unprofitable for some farmers and prompted Starbucks Corp. to pay growers a premium to cushion the blow of low prices.

“The robusta futures market is depressed by the amount of conilons sitting at the exchange warehouses, but there is a lot of technical selling too,” Rabobank analyst Carlos Mera said by phone, referring to Brazilian robusta. “Going forward, robusta is unlikely to stay at these prices for long as consumption is increasing and there is expectation of production cuts in some countries.”

Robusta futures rose 1% to $1,266 a ton in London, but are still down 17% this year. Arabica, used in specialty drinks such as those made by Starbucks, added 0.6% to 97.60 cents a pound in New York. It’s down 4.2% this year.

Here’s are some key market drivers:

Market Glut

While the International Coffee Organization last week lowered its estimate for the 2018-19 surplus, it still expects the amount to almost triple to 4.05 million bags. The back-to-back glut helped global exports climb about 9% in the first 11 months of the season.

Bearish Investors

Money managers have been betting on lower robusta prices since December and boosted their net-short position to a record in the week to Oct. 1, exchange data showed on Friday. They’re also bearish on arabica. Still, with such lofty short positions, there’s a potential for prices to rally if speculators start closing out bearish wagers.

Market Impact

Cheaper coffee is good news for roasters buying beans, but it’s crippling many farmers around the world where prices are below the cost of production. That’s particularly the case in places like Colombia and Mexico, where growers are struggling to compete with rising output in Brazil.

In a bid to help growers -- and possibly to protect supplies of high-quality beans the company needs -- Starbucks has paid over 8,000 farmers in Mexico, El Salvador, Nicaragua and Guatemala a premium totaling $20 million. The ICO is also setting up a task force with the private sector to address low prices and the long-term sustainability of the market.

In other soft commodities:

• Raw sugar was steady at 12.52 cents a pound in New York.
• READ: India Mills Contract to Export 150,000 Tons Sugar Since Oct. 1
• Cocoa fell 0.7% to $2,404 a ton in New York, near the lowest since mid-September.
• READ: Ivory Coast 2018-19 Cocoa Harvest Exceeds Record Forecast

To contact the reporter on this story: Manisha Jha in London at mjha13@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Nicholas Larkin, Liezel Hill

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