Unit 1 Micro: Brazilian coffee buffer stock hit by falling prices

Just a few years ago, Conab, Brazil’s official crop bureau was busy buying up surplus supplies of Brazilian coffee to support the weak global price of high quality arabica coffee. Over the years Conab has accumulated large stockpiles of coffee in their warehouses. Some estimates put the 2002-2003 stockpile purchases at just under 4 million kg together with 1.9m kg bought in 2007-08. The 2009-10 buffer stock purchases are much higher - exceeding 91 million kg. That is a lot of coffee to hold in reserve!

In theory a buffer stock scheme should be profitable when stocks are purchased at a low price and then off-loaded onto the market when prices are higher. Indeed Conab was planning just such a sale earlier this year before favorable weather and the speculators intervened. Better than expected coffee harvests in Brazil have prompted a steep fall in coffee prices and the buffer stock has postponed an intervention into the market.

The coffee price drop is a far cry from last year. Arabica coffee prices hit a 34-year high in March 2011 amid fears of a shortage. Since then, much has changed. From a peak of $3.089 per pound nearly a year ago, prices are down roughly 40 per cent to $1.851 per pound.

Inventories of high-quality beans remain low, but the threat of a shortage has vanished as Brazil is expected to see a bumper harvest this year. This is in contrast to a number of other coffee-growing countries - but Brazil remains a dominant force in the market.

As our price chart shows, the world price of coffee has been falling rapidly in recent months. This is great news for coffee roasters and perhaps coffee consumers (although the price of raw coffee beans is just a small percentage of the retail price). But it is bad news for Conab who are sat on coffee stockpiles worth about 1% of annual global supply whose price and value is deteriorating more or less every day.

They need to sell supplies to the market to raise revenue and to free up storage space in case they need to become purchases again should the world price collapse further threatening incomes, investment and jobs in the Brazilian coffee industry.

Falling prices are the result of a much larger than expected market supply especially from Brazil - the world’s largest grower of coffee beans. Output of the mild-tasting arabica variety will increase to 39 million bags in 2012, from 32.2 million bags last year. Output of the robusta variety, used to make instant coffee, will jump to as much as 13.3 million bags, from 11.3 million.

This increase in supply can be shown by an outward shift of the market supply curve.

High prices in 2010-11 have caused a sizeable change in the area of farmland cultivated for coffee production in Brazil as farmers responded to the profit motive. Some analysts have found there to be a 50 per cent increase in the average price received by Brazilian growers in the crop year 2010-11 leading a forecast rise in Brazil’s total area harvested from 2.09m hectares to as much as 2.45m hectares between 2010 and 2014. The extra supply may be coming onto the market just as world prices are falling away.

Price of coffee set to rise (May 2011)