Brazil rain may revive wilting coffee prices

* Arabica one of worst performing commodities in 2012

* Traders estimate Brazil crop at around 55 mln bags

By Sarah McFarlane

GENEVA, June 29 (Reuters) – High quality coffee prices could be plucked from 2 year lows as weather problems in world top grower Brazil damage beans, but demand remains tricky as cash-strapped consumers seek out cheaper blends.

Arabica coffee is one of the worst performers of a struggling commodities sector in the year to date, shedding around 30 percent in value to its lowest since 2010 last week, reflecting consumer preferences for cheaper blends. A bumper crop from Brazil also loomed in the background.

But the May-September coffee harvest in the world’s top producer has made slower progress than usual due to torrential rains in June that have not only delayed the flow of beans to the market, but also spoiled much of the first produce to be gathered, damaging quality.

“The wet weather will impact the quality of the current crop, plus also the early flowering of the 2013/14 crop,” said Andrea Thompson, an analyst with CoffeeNetwork.

Brazil’s flowering period peaks in September/October and is key to the development of the future crop.

“There’s been reports of some fungus problems in patchy early flowering of the next crop which will affect quality,” Thompson added.

With arabica prices hitting a two-year low last week of $1.5010 per lb, not far from where traders estimate the cost of production for Brazilian arabicas at $1.10-$1.40 per lb, there’s also concern that these price levels are not sustainable if coffee output is to keep pace with consumption growth.

“In our view coffee prices will have to go up if the market wants to keep the Brazilian coffee factory running,” said Carlos Brando, director at P&A Marketing International, the speciality coffee and coffee machine exporter.

The official government estimate for this year’s on-year crop in Brazil’s biennial cycle is a record 50.45 million 60-kg bags, up from 48.09 million bags in 2010/11.

Private traders, whose estimates typically exceed the government view, forecast Brazil’s current crop will reach a record of about 55 million bags.

“There’s concern regarding the quality of the crop now. I don’t think there’s a concern with regard to the size of the crop,” said a London-based broker.

Analyst F.O. Licht forecasts a small global coffee surplus of around 1 million bags in 2011/12.

“I think it’s going to be very hard for the market to trade below $1.50 a lb given how much consumption has expanded globally. Coffee is not something that you can ramp up production on very quickly because we have limited production areas,” said Sterling Smith, commodity analyst for Citi Institutional Client Group in Chicago.

Smith forecasts that the benchmark arabica futures contract will hover around $1.85-$2.05 by the end of 2012.

Ayrton Costalarge, trade manager at Cocapec cooperative in Franca, in the north of Sao Paulo state also saw a price floor of around $1.50 due to slow supply growth in other coffee producing nations and rising consumption.

“I’m confident that from September onwards we’re looking at a market at $1.80.”

WEAK COFFEE

Accounting for around 60 percent of global coffee output, arabica dominates premium coffee blends.

An 11-month rally which more than doubled the ICE benchmark arabica coffee futures price, lifting the market above $3 per lb to a 34-year high in May 2011, triggered some roaster switching out of arabica and into cheaper robusta beans where possible in their blends.

Volcafe, the coffee arm of commodity trade house ED&F Man, noted in its weekly report that the composition of European Union imports in the first quarter included 5 percent growth in robustas and 1 percent growth in mild arabicas, but a 6 percent fall in green Brazilian arabica’s share of imports, versus the same period a year earlier.

Strong demand for cheaper coffee blends is expected to push the premium for arabicas down in coming months, from levels already near a three-year low.

“Roasters have been selling more of the medium to lower (priced) end of blends,” said Renaud de Kerchove, managing director of coffee at trade house ECOM Agroindustrial Corp.

Lower grade robusta beans, which account for around 40 percent of world output and are mostly used in instant coffee, have benefited from a surge in demand for cheaper beans which helped push prices to an 8-1/2-month high at the end of May.

Established coffee drinking markets including North America and Western Europe have seen consumers become more frugal as the economic slowdown bites.

“Any (demand) slowdown in mature markets is mostly based on consumers becoming more conscious of how they use their coffee and avoiding waste,” said a coffee buyer at an international roaster. (Additional reporting by Emma Farge, Marcy Nicholson and Peter Murphy; editing by Veronica Brown and Keiron Henderson)

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