WSJournal. Coffee Demand Shifts Down-Marke.
Prices of robusta coffee beans are up 13% in the past year because of rising global demand, especially among price-conscious consumers in emerging markets like Russia and Brazil.
In contrast, consumption of the costlier arabica bean in its strongholds of the U.S. and Europe is barely rising due to tepid economic growth. This has helped push arabica prices down 37%.
Many investors are paying close attention to the narrowing price gap between robusta and arabica. On Thursday, arabica coffee futures finished at a seven-week low of $1.4030 a pound. Robusta futures hit a nearly four-month high of the equivalent of 95.2 cents a pound. Thursday's gap of 45 cents is the smallest since April 2009. The price difference has averaged $1.0972 a pound over the past two years.
The converging of coffee prices has awakened interest from investors who traditionally placed bets in the bigger, more heavily traded market for arabica beans. Because robusta beans still are cheaper, many food companies are sticking with them, at least for now.
"The world is using more, cheaper [coffee] blends," said Gustavo Moretti, a trader in Santos, Brazil, for Ecom Agroindustrial Corp., one of the world's biggest coffee traders. "It is related to the world economy that needs cheaper coffee on market shelves."
But many coffee aficionados say they will continue to eschew robusta. "We wouldn't buy it," says Ryan Johnson, a roaster at Toby's Estate Coffee, a cafe in the Williamsburg section of Brooklyn. "It tastes like tires."
Starbucks Corp. SBUX -0.34% roasts and services only arabica beans, even at its cafes in Vietnam, the world's biggest robusta grower. Even fast-food restaurants such as Yum Brands Inc.'s YUM +1.02% KFC Corp. are trying to lure customers with "100% arabica" coffee in South Africa.
Still, the starkest indication that some tastes are changing are the mounds of bagged beans sitting in warehouses from Edison, N.J., to Antwerp, Belgium.
Over the past year, exchange-certified stockpiles of arabica coffee have grown 72% to 2.6 million bags, each weighing 60 kilograms (132 pounds), a sign of flagging demand. Robusta inventories have shrunk 55% in the same period.
In a sign of robusta's wider acceptance, the Rogers International Commodity Index last month swapped arabica for robusta futures in the basket of raw materials it tracks. An estimated $6 billion in investor funds track the index, says Tom Price, chief executive of Chicago brokerage Price Futures Group.
"Consumption is moving in that direction, and we want to be a little ahead of the curve," said Jim Rogers, a commodity investor who designed the index.
Emil van Essen, a commodity trading adviser in Chicago who manages $400 million, says he expects the gap between robusta and arabica to go "down, down, down." In the next two months, Mr. Van Essen plans to add robusta to the mix of 17 commodities he trades.
Some traders predict the gap could narrow to just 40 cents a pound. At that point, coffee roasters and food companies would have a strong financial incentive to put more arabica in their coffee blends, analysts and traders say.
Many companies turned to robusta in the early 2000s because there was an arabica shortage.
Hans Hendriksen, managing director of Nedcoffee BV in the Netherlands and a trader of robusta futures, says money managers are piling into robusta "because they see continuing demand…from all markets."
The International Coffee Organization forecasts that demand for robusta coffee beans will grow 6% annually through 2015. Consumption of arabica beans is estimated to rise by 1% a year.
Supply forecasts are playing a role in robusta's run-up. Analysts at Macquarie Bank MQG.AU +0.75% estimate that the current robusta harvest in Vietnam will be 7% smaller than last year's crop due to a lack of rain during the plant's key flowering period.
Meanwhile, farmers in Brazil harvested a record arabica crop last year, and analysts already are raising expectations for the current crop. Brazil is the No. 1 arabica grower.
Supply forecasts are often off the mark. Few traders and investors expected Vietnam to export a record amount of robusta last year because massive flooding threatened to disrupt operations at important transportation hubs.
As well, some investors say the higher price tag on robusta is likely to start driving coffee consumption back to arabica. "We're going to start seeing some demand go the other way," says Shawn Hackett, president of brokerage Hackett Financial Advisors in Boynton Beach, Fla.
Some analysts say weather and disease threaten the world's arabica crop, grown mostly in Latin America. Those factors could erode supplies and lift arabica prices, widening the price gap.
For now, robusta beans are gaining popularity even in Brazil, which ranks second among growers of the bean. Brazil's exports of robusta fell 57% in 2012, a sign of strong domestic demand, says Guilherme Braga, director of an industry group of Brazil's coffee exporters.
Around the world, "demand for robusta was strong [last] year, and we expect it to continue to stay strong [this] year," says Francesco Tramontin, director of sustainability for Europe at Mondelez International Inc. MDLZ +0.14%
The world's hankering for robusta "is part of a much larger trend we see affecting coffee over the next 10 to 15 years," said Art Liming, a futures specialist at Citigroup C -0.42% .
