Brazil’s agriculture ministry’s says the government will start selling its arabica coffee stocks it bought from farmers to bolster prices in 2009.

Price of coffee is not about $1 more then what the government paid for. The stock will be sold in lots of 50,000 bags where 1 bag = 60 kilos. There are some 1.4 million bags (84,000 tons) of coffee in the stock.

In 2009, New York ICE coffee futures prices were $1.30 per lb. ICE March contract dropped 2.35 cents or 1.1 % to finish at $2.1735 per lb on Friday.

Arabica is used by coffee retailers like Starbucks.

Brazil produces about 45 million bags of coffee annually. Last Monday, some traders were sayingthat “if we get 55 million bags of coffee out of Brazil, it seems like $2.20 is a little high.”

Arabica supply problems were reported earlier in January because of out-of-season rains in Colombia and Central America.

Coffee roasters were reportedly in doubt how will consumers react to this shortage and whether to raise prices or blend more Robusta.

Analysts are saying that the price of coffee may surge up to 20% in 2012 on tight bank lending in Vietnam which is squeezing exporters on funding forcing them to cut coffee supply.

“When you tighten the purse strings on the exporters, the chances are that prices will rise due to a crackdown on supply. On a break of $1,840, we can see prices moving above $2,000,” says Jonathan Barrat, managing director of Commodity Broking Services in Sydney.

Vietnam’s coffee is typically sold at a discount to Liffe futures, a derivative contract based on Robusta Coffee price benchmark.

To combat its 18% inflation, Vietnam is tightening credit and that has cut off money to the exporters who need it to buy coffee beans from farmers.

Vietnam accounts for about 14% of global coffee output.

Coffee prices traded at $2,670 in the March peak, and at 11-month low of $1,784 per ton in November. International Coffee Organization pegs the 2011 yield at 128.6 million 60-kg bags, down from the 2010 production of 132.5.

A bad coffee harvest in Indonesia, fourth largest producer, is prompting Indonesians to import Vietnamese beans. This demand is prompting Vietnamese farmers not to be too eager to sell their crop.

“While withholding their sales, farmers are largely contributing, of course unwillingly, to a (future) bearish trend. However, with the bullish short-term prospects, we cannot blame the farmers. If we were in their shoes, we would probably have done the same,” says Herve Touraine of SW Commodities.

Supply could shrink more as bad weather in Colombia is casting doubts on the quality and size of that crop.

Over 81% of global coffee production in 2010 is attributed to 9 countries.

Coffee harvests occur at different times during the year depending on the location of the country so the coffee price is often influenced by the outcome of those harvests that occur at various times.

Some coffee firms are told they have to wait to January to get their order of NYSE Liffe certified coffee because coffee warehouses in Antwerp where some two-thirds of world’s supply are located are controlling deliveries and creating artificial bottlenecks.

“You shouldn’t have a situation whereby you’ve got physical premiums at significant levels and when people go to take up exchange stocks they discover they can’t access the product in a timely manner. The warehouses are preventing cash convergence as people are unable to use the exchange as a supplier of last resort as all commodity futures contracts should be,” says James Hearn, joint head of agriculture at broker Marex Spectron in London.

Metals warehouses are doing a similar thing by limiting the amount of metal they let out which jacks-up the price and produces profits which they pocket while end users complain.

“Many are turning to the spot market and effectively paying again for coffee they had already purchased on the exchange but cannot access,” explains Reuters.

“Conflicts in financial markets are one of the key issues being looked at by regulators. The warehouse keepers have a major conflict as their interests can be at odds with the interests of their customers; their customers may want coffee swiftly, whilst the warehouse is incentivized to hold onto coffee for as long as possible,” Marex’s Hearn said.

Just like in the metals market, regulators just keep looking at the issue.

Full story here.

Argentine farmers are hoarding millions of tons of beans gambling global prices will climb even higher. Vietnamese coffee farmers are also hoarding beans in anticipation of higher prices. In Ethiopia, the government is accusing coffee growers of hoarding the produce and threatening the hoarders with an export ban.

“This not only robs the country of hard currency earnings it was supposed to obtain from the sales but has also tarnished the nation’s image and diminished the confidence of foreign buyers,” Ethiopia’s state minister wrote in the letter.

Speculation in commodities and particularly in coffee looks to have spilled out of the futures floor and moved into every farm.

A dealer at an international trading house in Ho Chi Minh City says:

“Farmers are waiting for high prices, but maybe in July and August, they will sell more beans because they need the money to pay for children’s schooling.”

Another dealer in Ho Chi Minh City adds:

“There is a buying demand while selling is very little… We do not know now what prices farmers are expecting as they seem to wait for a higher price, and when that price is reached, they say they will wait for more.”

As the global coffee stocks started rapidly to deplete, circa 2004, coffee prices have spiked, but it is the action since 2010 that sent the coffee prices sky high.

From 2009 to 2010 world coffee stocks dropped over 25% precipitating a non-linear 100% rise in price.

The increase in price speculation and deliberate hoarding in anticipation of even greater price spikes may signal that the partiers in the coffee markets may be developing a hangover.

Coffee futures chart also signals exhaustion in the price momentum with very little price support down to $120.

Any favorable resolution with the frost threat in Brazil and Indonesia’s wet weather may convince the coffee hoarders that they should take any price before someone else does.

Bottom line, risk-reward ratio favors not initiating any long bets on coffee prices.

Coffee prices have gone up over 100% in the last year and Starbucks chief executive Howard Schultz recently accused hedge funds, index funds and market speculators for manipulating the coffee prices.

“In our view,” Schultz said coffee price rise “is the result of extreme speculation and not a result of normal market forces. We do not believe this is sustainable”.

On the other hand, Schultz did not say that his own CFO, Troy Alstead, was the man who was doing lots of that coffee hedging that caused the price pumping.

From Financial Times:

Ironically enough, one culprit may be Starbucks itself. With the prospect of higher coffee prices on the horizon, the company has sought to hedge as much of its price exposure as possible.“As the coffee prices began to escalate as we moved through December, we took the decision to remove that risk from this year, we think the responsible decision, and lock our pricing,” Troy Alstead, CFO, said in late January discussing the company’s quarterly results.

Then there are indications that coffee producers themselves are playing the speculator and not just the finance suits.

Take India’s coffee growers for example. Producers are playing speculators and withholding their crop in hopes of higher prices.

“While planters are holding on to stock in the hope of an upward trend in the price, buyers’ are deferring its purchase in the hope of downward price correction,” writes India’s Business Standard.

Ugandan paper describes a similar situation: “Coffee farmers, [who] in anticipation of better prices, decided to keep out of the market last month [April].”

On the fundamentals side, bad weather, expensive fertilizer, and growing coffee demand in the emerging markets is used to justify coffee’s price rise.

From Reuters:

Global demand for coffee is set to keep climbing and even a doubling in the cost of the commodity over the last 12 months has failed to quench consumers’ thirst for the beverage… There’s no impact (from high prices) in terms of a reduction in demand. Demand is still very dynamic,” ICO [International Coffee Organization] chief economist Denis Seudieu said.

ICO says that coffee demand will rise 2.4% per year.

In another sign that Starbucks should not be blamed for the coffee prices Elliot Wave happened to have made an accurate coffee price prediction last year and, perhaps seeking new subscribers for their Monthly Futures Junctures newsletter, are reminding readers of that accurate call:

If the patterns and analog reviewed in this months issue of Monthly Futures Junctures do indeed repeat, then coffee’s price could easily double from the current levels.
Needless to say, Elliot Wave asks “now that a major historical parallel has occurred, what is coffee’s long-term future?”

The future also looks fueled by media’s love of anecdotal claims that coffee drinking is a custom, that people are dumping tea for coffee, that demand is strong irrespective of price…

So, there we have it, producers speculating, resellers speculating, demand (2.4%) to go sky high irrespective of price, anecdotal claims used to justify price… classic signs of an ongoing bubble.