Arabica premium seen higher on robusta supply surge

April 3 (Bloomberg) -- The premium paid for arabica beans favored by Starbucks Corp. over the robusta used by Nestle SA may rally from a 20-month low because of a surge in supply from Vietnam, the biggest grower of the less costly coffee.

Arabica fell 18% in New York this year on prospects for a record Brazilian crop as robusta rose 12% 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.

Farmers in Vietnam have been stockpiling robusta as a hedge against consumer prices that surged 23% in August, according to Macquarie Group Ltd. With inflation moderating to 14% in March and harvests about to start in Indonesia and Brazil, they may now accelerate sales, the bank predicts. Arabica is poised to rally 10% in the next three months, as drought in Brazil threatens the crop and demand from emerging markets strengthens, Goldman Sachs Group Inc. estimates.

“People have focused on the shortage of robusta supplies, and that will change as the crops in Indonesia and Brazil come in and put pressure on the Vietnamese farmers to release their record crop,” said Keith Flury, an analyst at Rabobank in London. “The market is also seriously underestimating how tight the arabica supply-and-demand balance will be.”

Arabica Rebound

Arabica traded on ICE Futures U.S. fell 20% 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.

Robusta jumped 12% in the first quarter, the biggest gain in a year, and traded at $2,031 a metric ton (92.12 cents a pound) yesterday on NYSE Liffe. Prices will average $1,600 in the fourth quarter, 21% less than now, Rabobank’s Flury wrote in a report on March 27.

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 8.6% as the MSCI All- Country World Index of equities added 12%. Treasuries lost 1.2%, a Bank of America Corp. index shows.

Starbucks Costs

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

Global robusta supply will exceed demand by 1.2 million bags in the year that begins in October, compared with a 1 million-bag shortage in the current season, according to Winterthur, Switzerland-based Volcafe. Each bag weighs 60 kilograms (132 pounds). Arabica output will outpace consumption by about 800,000 bags in 2012-2013, compared with a 6 million- bag deficit in the current season, the unit of ED&F Man Holdings Ltd., a London-based commodities trader, forecast in a quarterly report in February.

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% 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.

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