Disruptions in Brazil's coffee supply brews trouble

Disruptions in the internal domestic supply of Brazilian coffee has affected prices in the world markets to such an extent that analysts say they feel price escalations will soon be seen at the retail and wholesale level.

Current world cash prices are $1.37 per pound, against approximately $1.30 the year before. The futures price for March delivery are trading in the low $1.50-per-pound range. The traditional spread between cash and futures has been much narrower than what appears today.

Short term supply problems due to weather related causes last winter have driven the price of coffee in Brazil up to the point where the Brazilian exporters are uncompetitive in the world markets and are doing their best to merely meet their own domestic demand.

Brazil, although still low in reserves and still burdened by international debt, has chosen to satisfy domestic demand first before releasing supplies into international channels. It is interesting to note the degree of importance that a single commodity has, and the sense of well being that a pupulace like Brazil, with all its problems, places on its unrestricted supply.

Brazil, which supplies approxomately 40% of the total world mild coffee market and 29% of the total world coffee market, has undershipped 3.94 million bags of its quota set by the governing International Coffee Organization. A single bag represents 60 kilos of coffee. This undershipment represents 25% of its quota for the first quarter of the coffee year.

Domestic Brazilian prices are actually 2^ to 3^ above world prices, forcing exporters out of the bidding for foreign markets. The International Brazilian Coffee Board has been forced to bring down prices in the domestic market to once again allow Brazilian supply to enter international channels.

This has included the auctioning off of 2 million-2.5 million bags of coffee held in reserve solely limited to meet the domestic demand. The auction, which began Feb. 2nd, is slated to auction 100,000 bags per day. This reserve gradually entering the domestic market may limit the amount necessary to be released, and more importantly, buffer any possible tremors created.

Meanwhile the world coffee market has been forced to look elsewhere for supply. Western Africa has been able to meet some of the additional demand, but only in the robusta segment of the coffee market, not the mild coffee supply cut short by the Brazilian situation.

Nicaragua, a supplier within the mild market, has also been beset with difficulties within their production quotas due to the civil unrest.

If the futures prices are any indication of what's to come, expect a price rise.

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