Big Drop Of Coffee

Illycaffe, Italy's second-biggest coffee maker, forecasts coffee prices to fall to $1 a pound this year, Illy said today in an interview in Sao Paulo. Coffee futures for May delivery fell 2 cents, or 1.7 percent, to $1.165 on the New York Board of Trade.

Brazil, the world's biggest coffee grower, will produce 35 million to 36 million bags in the harvest that starts in April, Illy said. Output will drop less than the government estimates because showers in the past five months and better irrigation have helped offset the damage from a drought in major coffee- growing areas during most of last year, he said.

"There has been enough rain" since October, said Illy, whose company imports more than half of its coffee from Brazil. "More and more farms have irrigation as well."

The government in December forecast coffee production to fall to as low as 31.1 million bags, compared with 42.5 million bags in the previous season. Output dropped partly because the trees are in the less-productive period of a two-year cycle, made worse by dry weather last year, the government said.

Should frost hit Brazilian coffee crops or a drought occur in Vietnam, the world's second-biggest coffee producer, futures could rise to as high as $1.80 per pound in New York this year, Illy said.

Price swings are more common as coffee stockpiles shrink, he said. World coffee inventories would need to grow to 45 million to 50 million bags, from about 35 million bags now, to reduce price swings, he said.

"The stockpiles are really low," said Illy, whose grandfather in 1935 invented the Illetta espresso machine that uses compressed air instead of steam to make coffee. "This means the balance between supply and demand is really tight."

The Trieste, Italy-based company, which produces ground coffee for espresso machines, imported about 200,000 bags of coffee from Brazil last year, Illy said. The company will likely boost imports by about 10 percent this year, said Illy, who declined to give a specific forecast.

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Coffee fell in New York, capping the biggest weekly drop in two months, as rising U.S. inventories renewed concern that supplies are more than adequate to meet demand.

Inventories in U.S. and European warehouses monitored by the New York Coffee, Sugar and Cocoa Exchange rose 0.3 percent to 3.75 million bags, and are up 12 percent in the past nine months. Another 205,501 bags are waiting to be graded as of Feb. 28, exchange data shows. Each bag weighs 132 pounds.

"You have an increasing amount of coffee stocks coming into the warehouses," said Paul Adler, a desk trader for ADM Investor Services Inc. in New York. "It seems like more coffee is getting into the pipeline."

Coffee for May delivery fell 1.45 cents, or 1.2 percent, to $1.1515 a pound on the New York Board of Trade, capping a 4.2 percent decline for the week, the biggest since Jan. 5.

"The roasters are pretty much fixed at this point and they will look to buy at lower levels," Adler said.

Prices also were eroded as commodity funds and speculators reduced their holdings in coffee futures, he said.

"If we break down below $1.143, you could see some continued pressure," Adler added.