Coffee drinkers treated to more arabica as prices sink

Reuters

* 3-4 million bags of demand seen switching to arabica

* Brazil main market where switching happening

By Sarah McFarlane

LONDON, Oct 30 (Reuters) - Coffee drinkers in Brazil,America, Eastern Europe and the Middle East are expected to downmore arabica beans in their brew in the coming year as cheapprices attract additional demand for the higher spec product.

A surplus from top grower Brazil after two successive bumpercrops helped drag arabica prices to afour-and-a-half-year low this week, which is likely to promptroasters to increase the use of the bean in their blends.

But drinkers detecting more of arabica's distinctivelysweeter, gentler notes in their cup will probably be saying moreabout the power of suggestion than their discernment, asroasters will only be tinkering with blend changes thatconsumers are unlikely to notice.

A Reuters poll of 10 international coffee traders androasters showed that between 3 and 4 million 60-kilogramme (132lb) bags of coffee demand - out of a market total of more than140 million - is forecast to switch out of robusta beans intoarabica in 2013/14.

Arabica beans are usually found in high quality brands andtypically trade at a premium to the hardier, more caffeine-richrobusta beans, which are widely used in instant coffee.

Lately the price difference between some of the lower gradearabicas and robustas has been eroded, putting in reverse thetrend from 2011/12, when roasters increased the proportion ofrobusta in their blends to the tune of around 5 million bagsglobally due to a historically high premium on arabicas.

"Clearly it's happening, although I don't think it's goingto be as big as the switch we saw out of arabica in 2011/12," aEuropean analyst said.

"The biggest swing is in Brazil."

The world's top coffee grower is also one of the largestconsumers, using over 20 million bags a year. Up to 1.5 millionbags of Brazil's domestic robusta consumption was forecast toswitch into arabica in 2013/14.

"Domestic roasters are fairly flexible so they can move outof robusta into low-grade arabicas on a large scale," said atrader, adding that Brazil was a very price-sensitive market.

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Coffee roasters, typically secretive about their blends,stepped up substitution of arabicas with robustas after ICEbenchmark arabica futures rose to a 34-year high in May2011 and the premium over robusta hit about $1.90/lb.

The premium has since narrowed to below 40 cents, anddealers said it could shrink further.

There is a wide spectrum of qualities within the arabica androbusta varieties, so the premium varies between differentgrades, with traders noting that Brazil's rio minas arabica hadtraded at a discount to some robustas in the past month.

"There will be switching, but the quantity will depend onthe quality of low-grade arabicas," a trader at an internationalroaster said.

Roasters have become more nimble in recent years to enablethemselves to react to prices and availability.

"In general customers (roasters) have become a little bitmore flexible in comparison to 10 years ago. In the past theblend or ingredients were written in stone, they wereuntouchable, and that has changed," a coffee trader said.

Beyond Brazil, traders and roasters said America, EasternEurope and the Middle East could also see some switching, thetrader said, noting that emerging coffee markets were lesssensitive to taste changes.

"In emerging countries people go more for price thananything else; they are not so picky quality-wise," the head ofcoffee at an international trade house said, adding that theWestern European market was not as flexible.

Robusta coffee futures traded at a three-year lowthis week, but traders were more bullish on their price outlookversus arabicas, pointing to low exchange stocks as a triggerfor future price rises to attract fresh beans.

In September brokerage Marex Spectron forecast 2013/14global coffee supply and demand at close to balanced, after a 7million bag surplus - all in arabicas - the previous year.

Brazil's coffee production rises and falls from one year tothe next due to its biennial cycle, as arabica trees need timeto recover after bearing large quantities of cherries.

The variations between 'on' and 'off' years have beendiminishing, however, partly due to improved maintenance,replanting of trees with higher-yielding varieties and increaseduse of fertiliser and irrigation.

The International Coffee Organization has not yet publishedforecasts for 2013/14. It estimated 2012/13 global production at145.2 million bags, of which around two fifths is robusta. TheICO pegged world consumption for calendar year 2012 growing 2.2percent to 142 million bags.

Future demand growth is expected to be focused in Asia, theregion where most of the world's robusta is grown, and wherecoffee is mostly consumed in the form of soluble or instant.

"I don't think that (the switching) means robusta demand isfalling. I think demand in Asia is strong enough that it morethan cancels any of that out. Both robusta and arabica demandwill grow this year," a trader said.

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