Coffee run-up may ultimately lose steam

The Economist noted last week that “a shortage of premium Arabica beans from Colombia (the world’s second largest producer behind Brazil) and Central America has sent coffee prices shooting up by 25% since the beginning of this year, and traders expect wholesale coffee prices to increase further before the arrival of the new Brazilian crop later this year.”  Bloomberg reported yesterday that “persistent wet weather in Colombia may hamper a recovery from last year’s 33-year production low by depriving plants of sunlight,” according to Jorge Lozano, head of the National Association of Coffee Exporters.  Meanwhile, inventories of arabica coffee in warehouses monitored by ICE Futures U.S. have dropped to the lowest level since May 2000.  Yet Sudakshina Unnikrishnan, a commodities analyst with Barclays, maintains that the price spikes in Arabica and Robusta coffee are not linked to underlying supply and demand issues.  “There is no fundamental reason for coffee prices to have increased so much in recent weeks,” she said back in June.  “Although global inventories have come off over the last few years for the 2010-2011 marketing year we are expecting Brazilian production to be very high.”

Eat, pray, invest in Indonesia?

Interesting column about Indonesia from last week’s NYT.  Aubrey Belford writes:

“Its low debt, high growth and a sense of optimism compare favorably with a mood of despondency in developed markets like the United States, Japan and Europe.  The huge consumer market in the country, accounting for more than two-thirds of G.D.P., has largely been credited for maintaining growth.  Although the global economic crisis crimped confidence, Indonesia’s relatively young population of 240 million and government stimulus policies, as well as a popular program of direct cash transfers to the poor, have kept consumption humming.”

While aiming to increase its FDI by almost three-fold in the next five years by in-part relaxing investment rules, the central bank is also engaged in a delicate balancing act of inviting capital inflows (its benchmark rate is 6.5 percent) while tempering potential outflows.  With Japan’s 0.1 percent borrowing rate looming nearby, for instance, the negative carry is the largest in the region, per Morgan Stanley.  The investment bank is in fact one of the country’s biggest cheerleaders at the moment (“Indonesia and India remain two of our long-term favourite selections,” gushed Henry H. McVey, Managing Director and Head of Global Macro and Asset Allocation for Morgan Stanley Investment Management, last month). 

To that extent, per Chetan Ahya and Sumeet Kariwala, two of the firm’s economists, Indonesia has myriad similarities with India apart from the trend in macro balance sheet changes (namely, its ratio of public debt to GDP declined to 35% in 2008, from a peak of 93% in 1999).  Like India, it has a benign trend in demographics with a falling age dependency ratio.  It also has a democratic political set-up, which implies that the role of government and state-owned enterprises would be low.  Specifically, they note:

“We are very confident in our view that Indonesia will see a trend similar to India’s in terms of the cost of capital and rise of the private corporate sector.  We do believe, however, that Indonesia has some structural deficiencies compared to India, which means that its growth will accelerate more slowly.”