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The emergence of Vietnam in the coffee industry has taken the world by storm and drastically changed the supply characteristics of the commodity. Less than ten years ago, Vietnam's coffee production was but a drop in the bucket of the entire world's supply. In an effort to jumpstart the country's agriculture business, the government of Vietnam offered farmers large subsidies to plant and grow coffee, which at the time was selling for huge profits worldwide. In the late 1990's, many rural Vietnamese began to do exactly that, and by 2000, coffee production had become one of the largest industries in the country. The rest of the world, however, was unprepared for such an onslaught of coffee supplies and by early 2003 prices on the New York Board of Trade reached their lowest point in over 100 years (adjusting for inflation). Farmers all over the world were in jeopardy, because production prices averaged around $.90/lb, while the sales prices hovered around 50-60 cents/lb. Places like Burundi and Ethiopia which base over 50% of their exports on coffee plants were decimated and huge social ramifications have transformed their culture. Ethiopia, which was just a few years ago one of the bright spots on Africa's map, is now on the verge of another bitter war with Eritrea. Many Colombian and Brazilian farmers have cut down their coffee trees and are now harvesting coca. Vietnam, however, because of their low cost of labor and lower quality beans, was still able to turn a profit despite the extremely low prices of 2003.
While low prices forced many farmers out of the business, some were kept alive by government subsidies, especially in Colombia. Nevertheless, this years crop is expected to be about a 10% decline from last year's crop. And for the first time in 7 years, there will be higher demand than supply, which will draw down reserves to less than 15 million bags. While prices have rebounded, they are still a fraction of what they were just a decade ago, and barely above production costs. At these prices, few farmers will enter the market and we may see a few years of underproduction in coffee. This makes an increase in the coffee price a very high probability in the next 2-3 years. The Commodity Investor recommends coffee as a strong buy in November 2005 at the $100/contract level. |
