Singapore, May 6 - While coffee prices are projected to be on an uptrend over the next three years, demand for Arabica beans is expected to grow at a faster pace than for robusta, according to a recent Morgan Stanley report.
"We recommend going long Arabica and short robusta. In particular, we see Arabica demand growth outstripping robusta as quality is demanded while production lags, compared to robusta, owing to appreciating producer country currencies," said the report.
The two largest Arabica producers, Brazil and Columbia, have seen their currencies appreciate significantly against the U.S. dollar, resulting in lower coffee prices in domestic currencies. This is likely to lower production incentives for Arabica producers.
On the other hand, the world's largest robusta producer, Vietnam, has been able to reap the full benefits of coffee's price rally as its currency has remained relatively stable against the dollar; the country is likely to increase supply side growth and hence pressure future price levels.
The move by companies such as McDonald's, Maxwell House and Dunkin Doughnuts to use only Arabica beans for their coffee is indicative of a reversal in the trend towards cheaper robusta coffee from traditional Arabica varieties, which started in the 1990s, said the report.
Arabica coffee on the Intercontinental Exchange is projected to average $1.25 per pound in the current marketing year ending September, and rise to $1.31/lb the following year, reaching $1.50/lb in 2011.