* Brazil coffee in ICE warehouses surging for first time
* Long-term trend underway that could weigh on prices
* Small farmers could be pushed out market for good
LONDON/NEW YORK, Nov 9 (Reuters) - Brazil is tightening its
grip on the global arabica coffee market as its beans surge into
ICE Futures exchange warehouses for the first time, a move that
could squeeze small producers out of the market and put pressure
on benchmark prices.
The world's top grower has long been able to supply large
volumes of affordable coffee for the mass market as mechanized
harvesting and cheaper processing methods keep its production
costs below those of its rivals.
As its total coffee production rises, Brazil is boosting
output of higher quality arabica and now, for the first time, is
sending its excess beans to the New York futures market
in significant volumes.
Data shows Brazilian coffee held in ICE warehouses and
available for delivery against futures contracts has soared to
88,294 bags from 650 bags on Sept. 3, helping boost total stocks
from recent 20-year lows of 1.1 million bags. <KC-TOT-TOT>.
The move poses a threat to rivals, mostly in South and
Central America, as it could weigh further on benchmark ICE
arabica futures, which fell to almost 14-year lows in
2019 and remain below many small growers' production costs.
ICE futures generally fall when the volume of stocks that
back them rises, while the potential for futures traders to
receive Brazilian coffee - less sought after than Central
American beans - could also drive them down.
The Brazilian influx so far is probably just the tip of the
Traders expect up to 400,000 bags will be delivered in the
coming months, the first major arrival since ICE amended its
rules in 2013 to allow premium Brazilian "semi-washed" coffee to
be delivered against its high-end "washed" arabica futures.
In future years, even more could be delivered.
Washed coffee, which involves the fruit being stripped away
using water before the beans are dried, costs more to produce
and commands higher prices.
Brazil produces mostly lower quality "naturals" where the
cherries are dried before the bean is extracted, but a high
quality coffee crop overall this year has allowed it to increase
output of "semi-washed" beans, a process with fewer steps than
fully washed but which still produces good quality coffee.
"If current market conditions were to arise again Brazil
semis would (be delivered) again," said Vivek Verma, CEO of Olam
Coffee, part of Olam, one of the world's largest
"Some washed producers would have to move out of coffee
altogether, which would be a tragedy," he added.
Honduras remains the main source of ICE exchange stocks with
856,425 bags. But that total has dropped by almost half from
1.52 million bags a year ago.
"The low coffee prices we've had mean farmers (outside
Brazil) don't want to harvest their coffee anymore, they don't
bother picking it, so we can't replace the certified stocks,"
said a coffee trader at a global commodities trade house.
Dealers believe Brazil produced 6 to 10 million bags of
semi-washed coffee this year, roughly double the amount it
The production surge has driven down the price of Brazilian
semis in the physical markets, which has meant delivering beans
to the exchange has become an attractive option.
This may not be the case every year but many believe a
long-term shift is underway.
"Brazilian semis are the future potentially, they could
become the dominant force of this market," the trader added.
A second trader said: "It would be quite a game changer.
People might invest in more washing capacity in Brazil and other
arabica origins will become a niche, premium, gourmet product
... it will take about three years for that to pan out."
(Reporting by Maytaal Angel and Marcelo Teixeira. Editing by
Nigel Hunt, Veronica Brown and David Evans)