Coffee Prices Rise in London, New York

The Robusta coffee traded in London, a lower-grade bean used primarily in instant coffee, recently reached a seven-year high after more than 5,000 metric tons of beans became moldy when warehouses in the Italian port of Trieste were flooded. Meanwhile, New York-traded Arabica coffee, the higher-grade stuff used at coffee shops like Starbucks, is starting to drift higher because of dry weather in Brazil.

On London's Euronext exchange Wednesday, the September coffee contract hit a new seven-year high of $2,063 per metric ton before settling $24 lower on the day at $2,000. So far, 884 lots of the coffee in Trieste have been examined, and more than half haven't made the grade. On its Web site Wednesday, Euronext said it examined another 117 lots and recertified only 40 of those.

Meanwhile, what's mostly driving the market in New York is drought in Brazil. The September contract, which will expire soon, slipped slightly Wednesday, but the December contract settled higher at a 1 1/2-week high of $1.1035 per pound on the New York Board of Trade.

"The plants are coming to a point where they start to flower, and they need a little water," said Jeanette Young, an independent trader on the Nybot. She explained that drought worries are gradually overtaking frost jitters as the southern hemisphere enters springtime.

The drought could affect Brazil's coffee output. The country is the largest producer, by far, of the world's coffee. It's projected this year to produce more than 40 million bags of coffee, or about 35 percent of the world's total production, said East Coast Options Services Inc. president James Calcagnini, who trades at the New York Board of Trade.

When prices are high, Brazil takes the opportunity to sell its coffee stocks, and if that supply starts to dwindle, coffee prices could increase significantly, Calcagnini said.

The recent supply-driven price activity has taken place against a backdrop of weak harvests out of Vietnam and rising global demand. World consumption in 2006 is estimated at around 117 million bags, up from 115 million a year earlier, according to the International Coffee Organization.

Analysts expect London's Robusta coffee prices to stay high until the Trieste mold issue is resolved, though it's "difficult to predict" how high prices may rise, said Jonathan Parkman, who heads the agricultural commodities brokerage at Fortis in London.

In New York, Arabica coffee isn't anywhere near a seven-year high _ or even a one-year high. The contract, which began in 1972 and saw its highest point above $3 a pound in 1977, has been within a range of about $1.04 to $1.14.

"So long as we stay inside that range, we're not going anywhere," Young said. "If we go past $1.142, we could go to $1.20 ... If we go beneath $1.047, we could go back under a dollar." The last time front-month Arabica futures traded below a dollar was late July.

There's been some talk that if Robusta prices rise higher, companies may start buying more higher-quality Arabica instead of Robusta. If that happens, the increased demand could drive up Arabica prices. That scenario is unlikely, though, given that Arabica is still so much more expensive than Robusta.

"For roasters to subsitute in cheap Arabicas, the price of Robusta would have to go up still significantly more than what it has," Calcagnini said.

Wednesday's Arabica closing price in New York is equivalent to $2,427.70 per metric ton _ about 20 percent above the Wednesday closing price of London's September Robusta contract, which will soon expire, and 155 percent above the much cheaper November Robusta contract, which settled at $1,590 per metric ton Wednesday.