Coffee prices are expected to increase in 2013 finding support from increasing global demand and tightening stock levels. Arabica prices are down over 52% from the 2011 high. However, a potential deficit in the 2013-14 season, as well as an already large short speculator position, will temper further downside. Robusta market prices are contingent on the Vietnamese crop, and as the current outlook is positive, major rallies are not anticipated, but expect moderately higher prices in 2013. The price difference between coffee varieties has settled to a level of stability in the coming year. The range-bound outlook for the spread between Arabica and Robusta prices in 2013 is a forecast for less volatile price action in the Arabica market. Coffee consumption has not decreased, but demand has largely moved away from washed Arabica to Brazilian-natural Arabica or Robusta, which has shifted differentials closer. This dynamic is a focal point in our forecasts for mostly lateral but positive movement in 2013.
Arabica fundamentals are forecast to be in surplus for 2012 and 2013, which will be a bearish aspect weighing on prices in late 2012 and early 2013 due to investor shorting and hand-to-mouth roaster buying. Market prices may hit a bottom in 2012, with a positive outlook in 2013 based on new season fundamentals and increased buying. The fundamental forecast for Arabica beans in 2012-2013 is for a 4.1 million-bag surplus, while early projections for 2013 and 2014 suggest a likely deficit. The Arabica price outlook in 2013 is positive due to this potential deficit, anticipated roaster buying and Brazilian farmers holding supply off the market.
Farmers in Brazil still have a significant amount of 2012 Arabica harvest to sell on the market, but given their well-capitalized position and government subsidies for storage, we anticipate the supply from Brazil will arrive only if prices are attractive. The speculator gross short position—near historic highs—is expected to be pared back in 2013 as the deficit season looms. The gross short position is equivalent to 14 million bags of coffee, and a reduction in 2013 will likely support futures prices. With the Arabica market in surplus, buyers have disciplined roasters in 2012, likely based on the assumption that the oversupply will result in a further reduction in prices. The outlook for 2013 calls for end users to increase buying to build stocks, which will support a retracing in the market.
Market expectations for the 2013 Brazilian Arabica crop will drive roaster buying and speculator positioning in the coming year. While early development is positive, it will be an off-season crop, potentially shifting the Arabica fundamental balance into deficit. The scale of the season-to-season production shift has fallen in the past decade due to agronomic practices. The difference between on- and off-season crops is anticipated to continue to shrink in the coming years, but given the scale of Brazilian production relative to global Arabica output—forecasted at 46% in 2012 and 2013—the off-season harvest will still likely bring about a global deficit in the coming seasons. Also impacting the supply of Arabica in 2013 will be lower incentives from prices. Multi-year production highs of Arabica in Central America, Asia and Africa in 2012 and 2013 were in part a reaction to the highest nominal season average New York price ever. In 2013, anticipate lower New York values and lower washed differentials will reduce incentives to use inputs and thus moderate yield potential in the short term. With reduced yields and an off-season Brazilian harvest, a high probability of an expected Arabica deficit supporting New York prices in 2013 is predicted.
The shifting demand profile in the coffee market will keep washed Arabica prices and differentials under pressure and support Brazilian Naturals and Robusta markets in 2013. Coffee-demand growth in 2013 is likely to be concentrated in emerging and nontraditional markets as it has been for the past couple of seasons. Given the price conscious consumers in these growing markets, roasters are expected to focus on lower-priced beans, therefore maximizing Robusta use. The 2010-2011 price rally in New York supported washed Arabica production. This, coupled with demand moving towards Brazilian Naturals, is projected to result in an oversupply of washed Arabica. In the short term, oversupply is illustrated by the New York exchange inventories growing 52% in the second half of 2012 as origins sell to the board due to modest physical buying interest. The post-boom Arabica market leaves Brazilian supply in demand while higher cost washed supply exceeds demand. In 2013, the market will have to pay Brazilian farmers higher prices to draw out supply while producers of washed Arabica will find the market oversupplied. This has resulted in differentials moving closer together, a situation that is likely to remain in 2013.
The Robusta market has been balanced with strong demand growth and large Vietnamese harvests, and in 2013 we see this dynamic continuing. Expect the market to be supported by increased consumption, especially at origin and in Asia. In our view, the substitution of Arabica for Robusta in 2010 and 2011, which estimated at between 3 million and 5 million bags globally, was a dynamic not expected to occur again. If the Robusta/Arabica price spread remains near current levels, we do not expect consumption to shift back to Arabica, and we do not expect further substitution. Robusta demand is forecast to increase 3.8% in 2012 and 2013, down from 11% the previous year, and will likely grow at a similar pace in the following season if prices are near our forecasts. Robusta market fundamentals are forecast to be in a modest deficit of 204,000 bags in 2012-2013. The continued growth in demand is expected to be countered by a large Vietnamese crop of 27 million bags in the new season.
The speculator gross long position in the Robusta market has been pared back significantly since its peak in July 2012 as the supply outlook improved. If Vietnamese and Indonesian crops meet expectations, investors will likely keep reducing long positions. A sharp reversal in the fund positioning is probable if bullish supply news arrives, and consequently our sense for price spike risks in Robusta are elevated. With our base case Robusta supply scenario for 2012 and 2013, we do not anticipate investors increasing the net long levels, but we expect commercial buying and the need to encourage Robusta production to be supportive factors, resulting in increasing prices in 2013. Early season harvest pressure coupled with fund liquidation is forecast to give way to commercial buying supporting futures prices.
Keith Flury, Senior Analyst Soft Commodities for Rabobank