It feels like the marketplace has been staring at Brazil forever in anticipation of the arrival and delivery of the weather reduced 2005/06 crop. Now as Christmas approaches we are right in the middle of the problem crop and many in the trade and industry might feel that they have a good handle on the situation and will hope that this particular situation is under control of a sort. As we get into early 2006 focus will be switching to the upcoming 2006/07 crop and most market participants agree that a sharp upswing in production is likely. Supply should be plentiful again and the roasters will hope for lower world prices as a result. However, in this crazy world of coffee, as one door closes, another opens.

The astonishing rise in production in Vietnam over the last 13 years or so has catapulted this origin into prominence and has enabled the multinational roasters to consider this country their robusta supplier of choice. Although Brazil conillon is widely liked by the roasters the constraints placed on supply by the demands of the internal roasters and the soluble manufacturers within Brazil means availability can be erratic to say the least. No such problems with Vietnam where internal consumption is hovering just below 1 mln bags a year. This really is a cash crop and as economists are wont to say, 'cash crops move'. Indonesia and West Africa still have a part to play, but Vietnam is top of the robusta pile and looks likely to stay that way for the foreseeable future.

The Vietnam 2005/06 crop is just coming onto stream as we go to print. Some major robusta traders have been warning of problems with this crop for a while now but many in the roasting fraternity seem to have been shutting their eyes and hoping that this would go away as they turned their attention towards Brazil. Now however the situation must be faced and it looks like it may be quite a difficult one.

The problem stems from a longer than normal dry season that began in early September 2004 and continued unabated until April/May 2005. The start of the dry season was early by around six weeks and the problem was compounded by extremely hot weather that saw temperatures in many coffee growing regions register as much as 40 degrees centigrade. The situation was especially severe in Dak Lak the province responsible for about 30% of
Vietnams' total production.

Many traders and analysts who toured the coffee areas reported local opinion that said that this extreme heat and extended dry season was much more severe than the last drought period of significance in 1997/98. Various web sites showed pictures of damaged trees and empty reservoirs as the situation reached its climax. The issue of empty reservoirs was particularly pertinent as the first flowerings in Vietnam are stimulated by irrigation during the closing stages of the dry season and not by the return of the rains.

Rains arrived in April/May 2005 and soon good levels of rainfall were being registered. This convinced some observers that this was sufficient to negate any large crop losses. Others insisted that the damage had already been done and that potential losses were irretrievable. As usual in the coffee market there then followed a lively debate as the market tried (and still tries) to reach a consensus view on what the size of the 2005/2006 will be.

Most observers are considering the crop size for 2005/2006 in terms of a percentage drop from the 2004/2005 crop. The range of these percentages seem to vary from 10% to 20% thus giving a very wide band if you also take into account the fact that most of these observers have vastly different views of the crop size in 2004/2005.

It is not always easy to get a handle on the size of the Vietnamese crop. The production figures from the ICO are erratic to say the least. They say that production in 2004/2005 was 12.5 mln bags whilst many trade houses were estimating a crop of around 15 mln bags give or take 0.5 mln bags. One major trade house actively involved in Vietnam estimated this crop at 16.2 mln bags.

Thus the question really is 10% or 20% of what in order to ascertain an accurate crop estimate. Looking at these trade houses actively involved in Vietnam it would seem that a spread of 14mln bags at the high end and 11 mln bags at the low end would appear to be the range. To add to this we can now add voices from within the local market. A trader in Buon Ma Thuot went into print recently with an estimate of between 10 mln bags and 10.5 mln bags. The chairman of the Vietnam Coffee and Cocoa Association pitched in with a range of 10.8 mln bags to 11.7 mln bags. Who to believe?

One thing is certain; the market needs robusta from Vietnam. ICO shipment figures show that in the 2003/2004 crop year Vietnam exported 14.50 mln bags and in the 2004/2005 crop year 13.95 mln bags. Although some of this coffee may have made its way to the board, a vast majority ended up in roasters silos.
If we look closely at the prevailing situation in Vietnam the picture we see at present would certainly point to the lower figure and not the higher. Shipments during September, October and thus far in November have virtually all come from trade house supplies sitting in Ho Chi Min City. No new crop to speak of has been seen and this has had the knock on effect of reducing any carry over in to the new crop. New crop arrivals are also being delayed by rainy weather and bean sizes are small, an indication of drought affected trees.

Normally at this time of year a large amount of Vietnam robusta has been traded forward with the major trade houses filling up the roasters with forward shipments on a price to be fixed basis. This gives the trade a nice set of forward shorts and enables them to dip into the internal market to cover whenever circumstances demand, for example on futures rallies and currency swings. This year that has not happened and the crop is pretty much un-traded as we go to print. Normally the world largest roaster holds a reverse auction and buys a huge spread of shipments throughout the coming year. The price obtained circulates throughout the market and this acts as a benchmark for a flurry of contracts as the other roasters and the trade get down to business. This year it is alleged that the roaster only bought a six month spread as he did not like the price. When the other roasters dipped their toes into the water they found the trade reluctant to make differentials to their liking. Hence a stalemate that is still unresolved today. Current fob offers for the benchmark Vietnam Robusta Grade 2 are currently around LIFFE less $70 pmt fob for shipment in bags, a level the roasters are disinclined to accept. Considering deliverable parity taking into account the probability of a grading allowance is around $130 pmt it is clear that many roasters consider LIFFE less $70 pmt fob a price not worth paying. But for how long?

Soon the roasters will have to make some hard choices. If they want to turn their backs on Vietnam where will they go for their robusta? A look at the current situation also reveals that there is not a great deal of choice when seeking robusta coffee. Indonesia is well sold whilst India and Uganda are tight with sky high differentials. Trade sources estimate that Brazil has harvested a very large conillon crop this year, probably in the region of 12 mln bags. However this figure is at odds with CONAB who estimate just 9.1 mln bags. At present there are no signs of any of this coffee coming onto the world market. As mentioned earlier it is quite likely that this coffee will be needed internally in Brazil as the arabica crop is so poor this year. However a sharp rise in futures prices and a weakening Real could change all that. The USA market is very keen on conillon and if the futures market was to rally sharply some of this coffee may start to move.
Although there is robusta on the spot in Europe, mainly LIFFE certified stock; there is virtually no robusta on the spot in the USA.

The issue of certified stocks is always a complex one for the roasters to consider. Lifting the LIFFE certified stocks is a strong sign that a bull market has come to town. Once the certified stock starts to disappear contango goes to backwardation and before you know where you are futures rally and every subsequent bag of coffee you buy costs more than you would like. There are additional problems of location and continuity of quality that make the whole thing a last option. Add to that the exorbitant ex warehouse delivery charges of some warehouses and the fact that many roasters now want bulk deliveries rather than bags just adds to the inconvenience. In light of all of that it can be expected that the roasters will probably stick with fob delivery if at all possible and lift the certified stock as a last resort. That being said, there is good quantity in the certified stocks with 3.35 mln bags registered as of 24th November 2205. It is interesting to note that the structure on LIFFE is beginning to tighten and this may mean some firm interest is emerging for this coffee. Spreads are now below cash and carry and the owners of the certified stock will have to decide soon if they wish to roll their hedges at a loss or deliver to the board and surrender the cheapest robusta available. The spread tightening is also being exacerbated by the lack of forward roaster price fix buying of futures. This is indicative of the uncertainty regarding future price action in front of the 2006/2007 Brazil crop.

The most likely outcome for this Vietnam crop is that it will trade in a nearby fashion. The farmers will want to sell out before the Tet festival that occurs in late January 2006. The collectors appear to be very bullish at present and it looks like the international trade will have to fight with them for the coffee. There seem to be few differentials available from the larger producers and it looks like the crop will be marketed on a flat price basis. This is a manageable proposition for the trade and industry in a bull market scenario. There is no doubt that the current robusta market matches that criteria but there is a major concern about how NYBOT performs and the implications that will have for LIFFE. Flat price business can get messy if prices fall particularly when internal groups such as the collectors get caught long and wrong. From the roasters point of view it seems that the safest course of action will be to buy hand to mouth on a just in time basis. If it goes wrong then a scramble for spot coffee will be needed to clear up the mess. The implications of the next larger Brazil crop will surely stop them from loading up with robusta and risking a crash on NYBOT.

Overall the market continues to be gripped with uncertainty but within that scenario the robusta outlook remains bullish. Despite weakness in NYBOT, LIFFE prices have held up well and the arbitrage is continuing to narrow. As usual in the world of coffee, it looks like the bumpy ride will continue for a little while yet