COFFEE SUPPLY AND DEMAND QUARTERLY REPORT MAY 2013

SUPPLY AND DEMAND QUARTERLY REPORT MAY 2013 FOCUS There are two seasons of consecutive surplus for the global coffee market, totalling 9.5 mio bags, in 12/13 and 13/14. Most of this surplus falls in Brazilian arabica. Brazilian arabica production is very large in both seasons: there is no 13/14 off-cycle. Brazilian arabica demand is not yet returning to previous high levels. Because robusta supply is still growing strongly, there is enough robusta to cover the new robusta demand in non-traditional markets, and enough to ensure that last year’s Brazilian arabica-to-robusta substitution in traditional markets won’t be reversed. Vietnam should produce around 30 mio bags in 13/14. A small statistical robusta surplus is in place, but it probably won’t show up in visible stocks, just in expanding pipelines as robusta demand is growing so fast. Rust-affected mild crops in Central America and in Peru are still a real concern. Relatively inelastic mild arabica demand means that 13/14 will see a mild arabica deficit, in the shadow of a big Brazil arabica surplus. This should be a classic differential story, but could coffee surprise us again?

continue. Productive tissue for 14/15 is already good, but there is a frost season and a rainy season to get through before we can call a very large 14/15 on-cycle. The internal market in Brazil has been very firm in recent weeks, with replacement differentials trading higher than export differentials for long periods of time. Producers are disciplined sellers. Vietnam: Green exports in the period October-April 12/13 are up 8% on exports in the same period last year. The rate of shipment will slow down in the coming months. The internal market, like Brazil, is very firm. The new 13/14 crop is fixed on the trees, with some flowering having occurred very early, due to unseasonal showers. The first large survey will be done in June, but initial indications from a number of farms we visit every April to compare crop development, are showing us that cherry load on the trees is up 33%.

I. COFFEE ORIGINS

These findings indicate a strong uptrend in productivity, but the size of the increase cannot be directly converted to a crop forecast yet. We are comfortable using a 30 mio bag crop number for Vietnam for 13/14, until we have more information in June.

Brazil:

Colombia:

The 13/14 Brazilian crop should have been an offcycle, but it’s going to be bigger than the 12/13 crop. ‘

Our December 2012 crop survey showed such deterioration in the economic health of the Colombian coffee farming sector compared to the previous survey, that we reduced our crop forecast markedly to 6.5 mio bags. Since then, export and production statistics Oct-April turned out to be 5.1 and 5.5 mio bags respectively. Even with 2 mio bags of green imports into Colombia from Peru, Ecuador, Brazil and Venezuela, these statistics (and an active internal market) are suggesting that the 12/13 crop is bigger than our low estimate. We thus revise it up to 7.5 mio bags. Coffee has been flowing well in the internal market, as is logical given the new coffee subsidy equivalent to 40 US cents/lb.

The 12/13 crop had the potential of more than 60 mio bags, but due to post-flowering dryness in October 2011, many flowers were aborted, and the crop fell short. Thus, trees had energy to produce more productive tissue than usual, and so had gas in the tank for 13/14. Ideal weather followed, new area is coming into production, and fertilizer use and disease control has been high. After concluding our second crop survey of the season, we believe Brazilian coffee production in 13/14 will reach almost 58 mio bags, 1 mio bags more than 12/13. Investment in coffee has been strong in the last couple of years, but with lower prices, this may not

Central America: Due to a large carryover, 12/13 exports from this rust-affected region have so far surprised to the

SUPPLY AND DEMAND QUARTERLY REPORT MAY 2013 upside. Oct-March exports from the five main CAM origins are up 2% on the same period in 11/12, while Oct-April exports should be around 1% up. Production in 12/13 is estimated at 13.1 mio bags, down 7% on the 14.1 mio bags produced in 11/12, which was the highest regional crop in more than a decade. The 13/14 crop is more severely affected, and we see output falling a further 2.5 mio bags to 10.7 mio bags. Crop surveys start next month in the region. Peru: Peru is now harvesting a rust-affected crop, and just as Central America experienced delays in the initial coffee flow a few months ago, the Peruvian internal market is feeling a lack of coffee at a time of year when coffee is normally flowing freely. We estimate 13/14 Peruvian production at 4.0 mio bags, with rust having reduced a 5+ mio bag potential production. Indonesia: Rains have delayed the new robusta crop arrivals in Sumatra, and replacement levels are particularly high. We estimate the new crop to be down 10% on the super crop last year. Uganda: Strong rains in Uganda do not seem to be hampering the arrival of the good Western robusta fly crop. Uganda production is estimated up 18% on the year, at 3.3 mio bags.

II. COFFEE DEMAND The main amendment we have made since the last quarterly is to North American demand, which we have revised up by 0.3 mio bags this year, and by 0.7 mio bags next year. Of all the traditional markets, the USA is showing the strongest growth. In the retail section, single serve coffees can’t be produced quickly enough. Sales of traditional bagged roast coffee are also growing. Disappearance in the USA grew by 4% last year. This year and next, we see demand growing by 2.5% per year, which may be a conservative forecast. Because it is a high-income country, the US market fits into the relatively price-inelastic, income-inelastic part of the coffee demand curve. That is, in total market

terms, coffee demand growth is driven by population growth, cultural variables and innovations like single serve. The effect of high price or lower income in the US is one of consumers changing to a cheaper blend, rather than drinking less coffee. The effect of low coffee price or higher income (both happening this year), should mean that the 2-3% demand growth trend does not change, but there is a possibility of a move to better quality coffees. How this pans out in the coming season, when washed milds are much less available, is a hard one to tackle. The other traditional markets, Western Europe and Japan, see flat coffee demand, while non-traditional markets see 5% overall coffee demand growth per year. This is led by Asian markets, with a regional headline demand growth figure of 7%. The soluble drinking countries of Thailand, Malaysia, Philippines and Indonesia have experienced double-digit coffee demand growth in recent years. The more mature coffee markets of Australia and South Korea have seen a huge swing to arabica, and are also seeing very good demand growth – just above North American rates. Coffee demand will grow by 4.5 mio bags this year and next. We do not see total arabica demand falling again like it did in 2012. So this year, 15% of the 4.5 mio bags is new arabica demand, and next year, 45%. Coffee demand will approach 150 mio bags by the 13/14 season.

III. BALANCES AND STOCKS The Brazilian arabica surplus of 9 mio bags over two years is dwarfing everything else. We estimate that carryover stocks of Brazil arabica rise to 13 mio bags this June, then to 15 mio bags in June 2014. Consumer port stocks of the same coffee will stay in the 3-4 mio bag range. Robusta has a 2 mio bag surplus over two seasons, and carryover stocks at origin we estimate steady at 4 mio bags, while consumer port stocks rise to 7 mio bags by Sep 2014 (or invisible pipeline stocks rise due to soaring robusta demand). Non-Brazil arabica has a deficit of 1 mio bags over two years. Origin stocks we estimate steady at 6 mio bags. Consumer port stocks are at a healthy level of 10 mio bags now, but they have to fall by 2014, to 9 mio bags. Most of the coffee market surplus is being held internally in Brazil, so the financial strength of Brazilian farmers is key to how the fundamentals interact with the coffee price.

SUPPLY AND DEMAND QUARTERLY REPORT MAY 2013 PRODUCTION BY COUNTRY

CONSUMPTION BY REGION

mio 60kg bags

2011/12

2012/13

2013/14

Brazil Vietnam Colombia Indonesia India Peru Honduras Ethiopia Mexico Guatemala Uganda Côte d’Ivoire Costa Rica El Salvador Nicaragua China Others

48.0 28.0 7.0 6.2 6.0 5.1 5.7 4.8 4.3 3.6 2.8 2.1 1.6 1.3 1.8 1.0 10.7

56.8 26.5 7.5 11.7 5.7 4.2 5.1 4.9 4.5 3.5 3.3 1.7 1.6 1.2 1.7 1.0 10.9

57.8 30.0 7.5 10.5 5.7 4.0 4.0 4.9 3.9 2.8 3.2 1.9 1.4 1.1 1.4 1.0 11.0

TOTAL

140.1

151.8

152.0

CONSUMPTION BY TYPE

mio 60kg bags

2011/12

2012/13

2013/14

EU27

40.7

41.1

41.3

Other Europe

8.3

8.6

8.8

North America

25.8

26.4

27.1

Asia

28.7

30.7

32.8

Africa

8.1

8.5

9.0

Latin America

28.9

29.6

30.3

Extra Volume Coffee Consumption Per Year:

+3.7

+4.5

+4.5

growth

3%

3%

3%

TOTAL

140.4

144.9

149.4

BALANCE BY TYPE

2011/12

2012/13

2013/14

mio 60kg bags

2011/12

2012/13

2013/14

growth Total Robusta growth Brazil Arabica growth Non-Brazil Arabica growth Total Arabica

15% 62.9 -13% 33.4 2% 44.1 -5% 77.5

6% 66.8 2% 34.0 0% 44.1 1% 78.1

4% 69.3 10% 37.3 -3% 42.8 3% 80.1

Robusta Production Consumption

-0.5 62.4 62.9

1.2 68.0 66.8

0.7 70.0 69.3

Brazil Arabica Production Consumption

-1.1 32.3 33.4

5.3 39.3 34.0

3.4 40.7 37.3

Market Share Robusta Brazil Arabica Non-Brazil Arabica

45% 24% 31%

46% 23% 30%

46% 25% 29%

Non-Brazil Arabica Production Consumption

1.2 45.3 44.1

0.4 44.5 44.1

-1.5 41.3 42.8

140.4

144.9

149.4

TOTAL

-0.3

6.9

2.6

mio 60kg bags

TOTAL

SUPPLY AND DEMAND QUARTERLY REPORT MAY 2013

NON-BRAZIL ARABICA SUPPLY/DEMAND 1.5

BRAZIL ARABICA SUPPLY/DEMAND 47

15.0

balance

1.0

supply

0.5

demand

45 balance supply

46

demand

10.0

40

45

-1.0

43

goo

-1.5

5.0

35

0.0

30

-5.0

25

mio bags

44

-0.5

mio bags mio bags

mio bags

0.0

42 -2.0 41

-2.5 -3.0

-10.0

40 03/04

04/05

05/06

06/07

07/08

08/09

09/10

10/11

11/12

12/13

20 02/03

13/14

03/04

ROBUSTA SUPPLY/DEMAND

05/06

06/07

07/08

08/09

09/10

10/11

11/12

12/13

13/14

TOTAL SUPPLY/DEMAND

4.0

75

15.0

70 supply

160

balance supply demand

balance

3.0

04/05

150

10.0

2.0

65

demand 1.0

140

55 -1.0 50

mio bags

0.0

mio bags

mio bags

60

5.0 130 0.0 120

-2.0 45

-3.0

-5.0

110

40

-4.0 -5.0

35 02/03

03/04

04/05

05/06

06/07

07/08

08/09

09/10

10/11

11/12

12/13

13/14

-10.0

100 02/03

03/04

04/05

05/06

06/07

NEW YORK / LONDON ARBITRAGE

07/08

08/09

09/10

10/11

11/12

12/13

13/14

mio bags

02/03

35

Arabica

Robusta

10

25

15

10

6

4

0

0 08/09

10/11

13/14

8

13/14

2

Robusta 12/13

Arabica

12/13

12 11/12

INDONESIAN PRODUCTION

11/12

5

10/11

VIETNAMESE PRODUCTION 09/10

0

09/10

0

08/09

10

07/08

1

07/08

2

06/07

4

06/07

5 60

05/06

70

05/06

Conillon

6

04/05

PERUVIAN PRODUCTION

04/05

13/14

12/13

11/12

10/11

09/10

08/09

07/08

06/07

05/06

04/05

0 03/04

Mexico

03/04

4

03/04

Guatemala

02/03

6

02/03

Costa Rica

01/02

00/01

Nicaragua mio bags

El Salvador

02/03

12/13 13/14

18

01/02

10/11 11/12

C. AMERICAN & MEXICAN PRODUCTION

01/02

08/09 09/10

10

00/01

3 mio bags

06/07 07/08

20

00/01

20

mio bags

04/05 05/06

2

13/14

02/03 03/04

8

12/13

00/01 01/02

mio bags

12

13/14

11/12

10/11

09/10

08/09

07/08

06/07

05/06

04/05

03/04

02/03

01/02

00/01

mio bags

14

12/13

11/12

10/11

09/10

08/09

07/08

06/07

05/06

04/05

03/04

02/03

30

01/02

00/01

mio bags

SUPPLY AND DEMAND QUARTERLY REPORT MAY 2013

COLOMBIAN PRODUCTION

14

16 12

10 8

6

4

Honduras 2

0

BRAZILIAN PRODUCTION

Arabica

50

40

30

20

SUPPLY AND DEMAND QUARTERLY REPORT MAY 2013

DEMAND: ROBUSTA WINS, ARABICA LOSES

THE NEW COFFEE DEMAND

12 Annual change in robusta demand

10

Annual change in arabica demand

8

mio bags

6 4

2 0

-2 -4

13/14

12/13

TOTAL COFFEE END-SEASON STOCKS

TOTAL STOCKS VS. STOCK/DEMAND RATIO 50

ARABICA STOCKS VS. STOCK/DEMAND RATIO 55%

Arabica Stock

stock/demand ratio

13

0.3

11

0.25

50%

Arabica Stock/Demand Ratio

stock/demand ratio

35

ROBUSTA STOCKS VS. STOCK/DEMAND RATIO

40%

mio bags

30

9

0.2

35% 25

7

0.15

Robusta Stock

30%

Robusta Stock/Demand Ratio 13/14

12/13

11/12

10/11

09/10

08/09

07/08

06/07

05/06

04/05

03/04

02/03

0.1 01/02

5 00/01

13/14

12/13

11/12

10/11

09/10

08/09

07/08

06/07

05/06

04/05

03/04

02/03

25% 01/02

20 00/01

mio bags

45%

stock/demand ratio

40

13/14

24%

13/14

11/12

12/13

10/11

09/10

08/09

07/08

05/06

06/07

04/05

03/04

02/03

00/01

01/02

30 12/13

Consumer Milds

29%

11/12

5 -

35

06/07

Consumer Brazils

05/06

10

34%

04/05

Consumer Robusta

15

39%

40

03/04

20

00/01

mio bags

Origin Milds

25

02/03

Origin Robusta

30

Total Stock/Demand Ratio

45

01/02

35

10/11

Origin Brazils

mio bags

40

44%

Total Stock

09/10

45

08/09

50

07/08

11/12

10/11

09/10

08/09

07/08

06/07

05/06

04/05

03/04

02/03

01/02

-6

SUPPLY AND DEMAND QUARTERLY REPORT MAY 2013

DIFFS BRAZIL 93-13

DIFFS PERU 93-13

40

40

20

30

MCM (Grade 2) Grade 1 20 cts/lb FOB vs. ‘C’

cts/lb FOB vs. ‘C’

0

-20

primeiro

-40

10

0

fine cup mtgb washed

-60

-10

-80

-20

Jul 93

Jul 95

Jul 97

Jul 99

Jul 01

Jul 03

Jul 05

Jul 07

Jul 09

Jul 93

Jul 11

DIFFS COLOMBIA 93-13 50

100

40 excelso

30

supremo

20

80

Jul 99

Jul 01

Jul 03

Jul 05

Jul 07

Jul 09

Jul 11

Jul 09

Jul 11

costa rica hb guatemala hb honduras hg salvador hg

cts/lb FOB vs. ‘C’

cts/lb FOB vs. ‘C’

Jul 97

DIFFS CENTRALS 93-13

120

60 40 20

10

0 -10

0

-20

-20 Jul 93

Jul 95

-30 Jul 95

Jul 97

Jul 99

Jul 01

Jul 03

Jul 05

Jul 07

Jul 09

Jul 93

Jul 11

DIFFS ROBUSTA 93-13 800

Jul 97

Jul 99

Jul 01

Jul 03

Jul 05

Jul 07

DIFFS AFRICA/ASIAN ARABICA 93-13 250

vietnam gII

600

Jul 95

kenya ab faq ethiopia sidamo 2

200

indo ek80

ethiopia djimmah uganda scr 15 cts/lb FOB vs. ‘C’

400 USD FOB vs. Liffe

150

200

png y-grade

100 50

0

0 -200

-50

-400 Jul 93

-100 Jul 95

Jul 97

Jul 99

Jul 01

Jul 03

Jul 05

Jul 07

Jul 09

Jul 11

Jul 93

Jul 95

Jul 97

Jul 99

Jul 01

Jul 03

Jul 05

Jul 07

Jul 09

Jul 11