Date:18/10/2008 URL: http://www.thehindubusinessline.com/2008/10/18/stories/2008101850391201.htm

Back Global financial crisis impacts coffee

G.K. Nair

Kochi, Oct 17

Coffee prices, like other commodities, have been affected by the current financial turmoil, but it is expected to sustain almost at the current levels during the coming winter months as the demand is likely to outweigh the supply.

Credit restrictions and lack of liquidity caused by the crisis could lead to a reduction in supply while it is expected that the forthcoming winter season will help sustain demand. While coffee fundamentals remain in a tight balance, the price outlook in the short run is likely to continue to be dominated by the instability of world financial markets, according to ICO sources.

The preliminary estimate of world consumption in calendar year 2007 is around 124.6 million bags compared to 121.2 million bags in 2006, an increase of 2.9 per cent. The effect of the financial crisis on unemployment and consumption in importing countries cannot yet be assessed.

CHANGE IN CONSUMPTION

However, according to industry sources here, a change in consumption patterns is likely with coffee being increasingly consumed in the home. Despite the current economic turbulence, estimates of world consumption in 2008 still indicate a figure of around 128 million bags, they claimed.

In September, it fell with the ICO composite indicator price at 126.69 cents/lb compared to 131.14 cents in August. The average of the ICO composite indicator price for coffee year 2007-08 was 126.67 cents/lb. The opening days of October witnessed a sharp drop in prices, as the ICO composite indicator price fell below 110 cents a lb, representing a 17.7 per cent decrease compared to the level at the beginning of September. ICO composite indicator price stood at 111.20 cents/lb on October 14 as against120.15 on October 1, 2008.

GLOBAL MELTDOWN

The crisis in the global financial markets is having a direct effect on commodities in general, including coffee, despite the fact that the coffee supply and demand fundamentals remain unchanged.

The dollar has continued to strengthen in relation to the currencies of many exporting countries, while commodity prices in general are falling. The current crisis in the financial markets appears to be having further repercussions on the coffee market, especially in view of the credit restrictions and lack of liquidity affecting major trade operators.

Credit restrictions also affect producers, who are likely to be forced to reduce their expenditures on investment and maintenance, with a possible reduction in the supply of coffee in the medium term. Inflation levels are also going up in exporting and importing countries. ICO has maintained its estimate of world production in crop year 2008-09 at around 131 million bags.

EXPORTS SLIDE

Exports by all exporting countries during August totalled 7.4 million bags, down from 8.1 million bags in July. Exports during the first 11 months of coffee year 2007-08 (Oct 2007-Aug 2008) fell by 4.5 per cent to 86.6 million bags from 90.7 million bags for the same period in coffee year 2006-07.

However, provisional exports of coffee, including instant and re-exporting, from January 1 to October 15 stood at 1,92,086 tonnes, up from 1,82,187 tonnes in the corresponding period last year. Exports of instant coffee have shown a decline of around 8,000 tonnes to 32,803 tonne from 40,552 tonnes last year. Re-exports, however, shot up to 19,652 tonnes from 9,878 tonnes during January-October 2007.

According to ICO sources at the 101st Session of the International Coffee Council held from September 22-26 2008, a new time limit of September 25, 2009 was set for the signature and deposit of instruments of ratification, acceptance or approval of the International Coffee Agreement 2007. This new time limit should allow sufficient time for Governments to complete their procedures for membership of the Organisation.