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Coffee Searches For A New Caffeine Fix

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When the front-month Arabica futures contract hit a 14-year high of $3.0625 a pound on May 3, some analysts predicted prices could reach an unprecedented $4 a pound, as low world supplies of the coffee beans left buyers scrambling for their caffeine fix.

But now some forecasters warn that a slump, which has wiped more than a fifth off prices since then, could take the contract below $2 a pound because of improving prospects for next year’s crop. Concerns that frost could hurt production in Brazil, the world’s largest producer, have waned, offsetting worries that global harvests haven’t kept pace with rising demand.

Although Brazil is expected to produce less coffee this year as part of its biannual low-output season, when trees naturally produce fewer beans, the government’s forecasting agency still expects a record off-crop of 43.5 million 60-kilogram bags in the 2011-12 crop year.

“Supplies of washed Arabica beans are still tight, but the just-starting harvest in Brazil should provide some pressure [on prices] in the foreseeable future,” said Birgit Wippler, a commodities analyst with Germany-based F.O. Licht.

Production in Colombia, the biggest producer of mild washed Arabica beans—the type traded in New York and favored for their subtler flavor—is also expected to recover after two seasons of poor harvests.

The U.S. Department of Agriculture’s Bogota attaché forecasts output will rise 10% in 2011-12 to 10.5 million bags, leaving 9.7 million bags of exports.

The New York July Arabica contract settled up 1.30 cents, or 0.5%, at $2.4900 a pound Friday on the IntercontinentalExchange. The contract on Thursday touched $2.3965 a pound, its lowest intraday point since Jan. 28, down more than a fifth from the 14-year high of $3.0625 pound reached on May 3.

Luis Rangel, a vice president at U.S.-based ICAP futures, said the contract could hit $1.98 a pound in the third quarter, as the Brazilian harvest gains momentum in August.

Indeed, some argue that world supplies of Arabica aren’t as low as thought. Rodrigo Costa, an analyst for brokerage Newedge, said some buyers may have supplies hidden in off-radar warehouses in Brazil. If so, production in the 2010-11 crop year may have been up to two million bags above market estimates at around 55 million bags and the harvest could be as high as 45 million bags this year.

“The bottom line is that bulls are in a tough position,” he said.

Others say the pullback is primarily because of an exodus of speculative investors from riskier assets, as a raft of data from the U.S. and China as well as the euro-zone debt crisis have sparked resurgent fears of a global economic slowdown. Coffee has been caught up in that broad selloff. Earlier this month, those investors held their first net-short position in the New York market in a year at 6,000 lots, according to data from the Commodity Futures Trading Commission.

Still, the world coffee market remains tight, which could underpin prices. Stocks in producing countries are near their lowest point in 45 years. Analysts have pointed to dryness threatening crops in Central America, including Guatemala and Honduras. Some forecast output from El Salvador may slump up to 25% this year.

Rising demand in Brazil, which is expected to overtake U.S. as the world’s largest coffee drinking nation as early as next year, and increasing consumption in other exporters, could leave less coffee for the world market. Overall, the International Coffee Organization estimates that global coffee consumption rose 2.4% to a record 134 million bags in 2010, outpacing 2010-11 production of 133 million bags and also the 130 million bags expected to be produced next year.

What goes up, must come down, the adage goes. But while some expect coffee’s descent to continue, it may not take much to send Arabica back to its caffeine highs.

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