Coffee Supply Crises on Horizon for 2007

Still, coffee traders have not yet priced in the risk of a deficit, reducing the probability that roasters will soon raise their list prices, which are used as a measure for setting prices for coffee shipped to supermarkets and store chains.

"I expect a supply problem, maybe even a supply crisis will hit us in the course of 2007, and it will not be over with for two years beyond," said Roland Veit, president of Paragon Coffee Trading Co. in New York.

"While I, and almost everyone else I know in the coffee business kind of agrees with this scenario, it is too early for the market to react," said Veit, who started his coffee career in 1972 as a commodities buyer for Nestle in Switzerland.

The International Coffee Organization expects world production in the 2006/07 season to reach 120 million 60-kg bags, up from about 107 million bags the previous season, thanks in large part to top coffee grower Brazil.

That's the good news. The trouble is that carryover stocks are low, consumption is rising and the coffee harvest in Brazil, which annually produces between 30-40 percent of world output, is based on a biennial cycle.

Brazilian coffee officials put the 2006/07 (July/June) crop at 40.62 million 60-kg bags, up 23 percent from the previous season due to an uptrend in arabica's biennial crop cycle.

But the country's 2007/08 harvest could drop to about 37 million bags, according to a Reuters poll earlier this month.

Global coffee consumption in 2006 is forecast between 118 and 123 million bags. And future supply may not be enough to cover growing demand fueled largely by emerging coffee markets in Asia and eastern Europe, as well as in producing countries.

"The demand side of the equation is shifting, and in two or three years you can really see global demand change," said James Cordier, president of Liberty Trading Group, a Florida-based commodity brokerage.