Arabica Coffee Trade Fell 20 percent on ICE Futures

Coffee arabica traded on ICE Futures U.S. fell 20 percent in the first three months of the year, the biggest quarterly decline in more than a decade, and reached a 17-month low of $1.7445 a pound on March 22. Futures that closed at $1.862 yesterday will reach $2 in three months, Goldman’s commodity research team, led by Jeffrey Currie in London, wrote in a report March 28.

Arabica fell 18 percent in New York this year on prospects for a record Brazilian crop as robusta rose 12 percent in London because of fewer cargoes from Vietnam. The premium dropped to 83.89 cents a pound on March 29, the lowest since July 2010. It will widen to $1.162 by the end of the year, the average of 18 analyst estimates compiled by Bloomberg shows.

Arabica is the second-worst performer this year in the Standard & Poor’s Spot GSCI Index of 24 commodities, behind natural gas. The gauge advanced 8.2 percent as the MSCI All- Country World Index of equities added 12 percent. Treasuries lost 1.2 percent, a Bank of America Corp. index shows.

Higher arabica prices may raise costs for Seattle-based Starbucks and Waterbury, Vermont-based Green Mountain Coffee Roasters Inc. (GMCR) Cheaper robusta may help Vevey, Switzerland-based Nestle, which uses the variety to make Nescafe and has about 51 percent of the global instant-coffee market, according to Euromonitor International.

Arabica supplies may be tighter than futures markets are anticipating. While the government of Brazil, the largest grower, has forecast a record crop in the marketing year that begins in July, most of the gains will be in robusta and arabica output may actually decline, estimates Terra Forte Exportacao e Importacao de Cafe Ltda., the country’s second-largest exporter.

Growers of arabica, which will enter the higher-yielding half of a two-year production cycle in July, will collect 37.4 million bags, almost 11 percent less than they did in the previous peak year, Terra Forte predicts. Robusta output will climb to 16.5 million bags, from 14.3 million a year earlier, the Sao Joao da Boa Vista, Brazil-based company forecasts.

Arabica inventories at ICE-monitored warehouses are 41 percent smaller than two years ago, before prices began a rally to a 14-year high in May 2011, exchange data show. Stockpiles may not be replenished soon because heavier-than-normal rainfall in Colombia, the second-biggest grower of the variety, damaged crops. Production may fall to as low as 7.5 million bags this season, a 36-year low, according to Andres Valencia, the marketing chief at the National Federation of Coffee Growers.

The anticipated gains in arabica prices may be curbed by signs that economic growth is slowing, said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. Prices fell 18 percent in 2008, amid the worst global recession since World War II. The premium to robusta narrowed to as little as 26.1 cents in March 2008, data compiled by Bloomberg show.

Hedge funds and other money managers have been betting on lower arabica prices since mid-February, Commodity Futures Trading Commission data show. They held a net-short position of 9,964 futures and options contracts in the week ended March 27. Funds increased their net-long position in robusta during the same week by 8.5 percent to 8,345 contracts, the most since NYSE Liffe started publishing the data in October.