Coffee prices in 2002 moved back and forth across a 20-cent range. Part of the price movement reflected changing expectations about the size of the important Brazilian coffee crop. In the first quarter of 2002, coffee futures prices traded above 60 cents per pound. As the Brazilian 2002/03 harvest season approached in May 2002, prices started to come under pressure. This pressure continued as there were no real threats to the Brazilian crop from cold weather. June marks the start of winter in the Southern Hemisphere and some of the most spectacular bull markets have occurred when there has been a frost or freeze in Brazil that damages the trees. In 1994 there were back-to-back frosts that did significant damage to the trees. In a very short period, coffee futures prices moved from about $1.00 per pound to nearly $3.00 per pound. The U.S. Department of Agriculture estimated that in the subsequent 1995/96 season, coffee production declined by 40 percent. As the Brazilian 2002/03 harvest continued and the crop appeared record large and prices came under more pressure dipping under 50 cents.

The very low prices for coffee have created many serious problems for coffee producers. When prices reach under the costs of production, there is little to no economic incentive to produce coffee. The result is that coffee trees are less cared for or completely abandoned. At low prices, producers cannot afford to hire the labor needed to maintain the trees and pick the crop at harvest. The result is that trees yield less due to reduced use of inputs like fertilizer and coffee workers are unemployed. One effect is that there is a reduction in the overall quality of the coffee that is produced. Higher quality Arabica coffee is often produced at higher altitudes which entails higher costs. It is this coffee that is often abandoned. The overall situation in terms of the coffee producers has been described as critical as there are few viable solutions.

In its December 2002 report, the U.S. Department of Agriculture forecast 2002/03 world coffee production would reach a record 125.1 million bags (60 kilograms or 132.3 pounds), an increase of some 3 million bags from the June estimate of 122.1 million bags. The previous record crop was in 2000/01 when 116.6 million bags were grown. The 2002/03 crop is expected to be some 12 percent more than the 2001/02 crop of 111.8 million bags. Among the coffee producing countries, stocks of coffee at the beginning of the 2002/03 season were 22.4 million bags, down 4 percent from the previous season. The total supply of coffee was forecast to be 148.9 million bags, an increase of 9 percent from the previous season. Exports of coffee beans were forecast to be 84.5 million bags, an increase of almost 4 percent from the prior season. Exports of roasted and ground coffee in 2002/03 were forecast to be 368,000 bags, an increase of 9 percent from the previous year. Exports of soluble coffee were estimated to be 5.26 million bags, an increase of 1 percent from the previous season. Domestic use of coffee by the coffee producing countries was forecast to be 28 million bags. With the large increase in coffee production, producer ending stocks in 2003 were forecast to increase 37 percent to 30.7 million bags.

Despite a forecast of record world production of 125.1 million bags, some 13.3 million bags more than in 2001/02, not all of the coffee producing countries had larger crops. There are about 57 countries that produce coffee. There are two basic types of coffee, arabica and robusta. Arabica coffee tends to have a milder flavor and is usually grown at higher altitudes. Robusta coffee has a heavier flavor and tends to be produced on lowlands. Arabica coffees command a premium in the market. Some countries like Brazil and India grow both arabica and robusta coffee while most countries grow one or the other.

The key coffee producing country is Brazil. Being in the Southern Hemisphere, the Brazilian coffee crop is harvested starting in May and extending for several weeks in what are the winter months. Brazil is subject to frosts and freezes and a major freeze occurs about every five years. These events occur most often in June, July and August. The U.S.D.A in its December report forecast the 2002/03 Brazilian coffee crop at a record 51.6 million bags, an increase of 4.7 million bags or 10 percent from the June estimate of 46.9 million bags. The 2001/02 Brazilian crop was estimated at 35.1 million bags making the current crop some 47 percent larger. Brazilian production is cyclical with small crops followed by large ones. This should mean that the next 2003/04 crop will be smaller. Weather is a key factor and there have been dry conditions in Brazil which could also argue for a smaller crop next season. Brazil is the largest exporter of coffee with 2002/03 exports forecast at 28.6 million bags. The Brazilian currency has weakened which encourages exports but the Brazilian government has been making an effort to finance the storage of coffee to keep prices from declining further.

Colombia's arabica coffee crop is forecast to be 11.2 million bags, down 6 percent from the previous year. Colombia is expected to export 10.1 million bags. Vietnam has emerged as a major robusta coffee producer and exporter. The 2002/03 crop is forecast to be 10 million bags, down 18 percent from the previous year. Exports are forecast to be 9.3 million bags.

Global coffee consumption in importing countries in 2001 was estimated to be 80.1 million bags. The U.S. is the largest consumer of coffee with 2001 consumption of 19.3 million bags. Germany had consumption of 9.5 million bags while Japan used 7 million bags.

Futures Markets

Coffee futures are traded on the Bolsa de Mercadorias & Futuros (BM&F), the Tokyo Grain Exchange (TGE), the London International Financial Futures and Options Exchange (LIFFE) and the CSCE Division of the New York Board of Trade (NYBOT). Options are traded on the BM&F, the LIFFE and the CSCE.

Excerpted from the CRB Commodity Yearbook. For more information on CRB products click here

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