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Latte Prices May Get Frothy as Coffee 'Rust' Blights Crop

Bruce Bennett | Getty Images

Brace yourself for a costlier latte. Coffee leaf rust - a fungus-borne disease devastating to plantations - has returned to plague crops in Central America, a region supplying 14 percent of the world's global production.

The situation is so dire that Costa Rica last Tuesday declared an emergency to tackle the spread of the coffee fungus that looks set to destroy about 12 percent of Costa Rica's planted coffee in the forthcoming 2013-14 harvest, the soft and agricultural commodities report, The Public Ledger, wrote on January 23.

A two-year emergency bill, signed jointly by Luis Liberman, Costa Rica's vice president, and the national coffee institute ICAFE, provisions about $4 million to pay for fungicides to tackle the Roya, or leaf rust, outbreak.

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Additionally, coffee crops in Guatemala, Honduras and parts of Mexico are also looking particularly vulnerable with estimated losses ranging between 30 percent and 50 percent in several areas, wrote Christopher Narayanan, head of agricultural commodities research, Societe Generale, in a report on Monday.

"Given the relatively small production compared to Brazil and Colombia, we view this situation as mildly supportive" for Arabica coffee futures traded in New York on the Intercontinental Exchange (ICE), he said. "But any widespread problems, especially those coupled with any problems in Colombia or this year's Brazilian harvest, are likely to pose significant upside risk to our new price forecasts."

Well-Supplied

Still, coffee consumers needn't fear too much - not right now at least - as coffee markets are fundamentally well-supplied. Societe Generale forecasts global stocks at nearly 42.5 million bags for 2013-14, up almost 64 percent on the year.

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High global inventories together with growing annual surpluses should more than cushion the blow from any disease-related shortages from Central America, Societe Generale said.

In fact the French bank slashed its price forecasts by more than 20 percent for this year and the next. Arabica coffee will likely average $1.5295 a pound this year, down from the prior forecast of $1.9675, according to Societe Generale. For 2014, prices will likely average $1.5222 a pound, down from $2.0509 prior.

Despite the deep cuts to its price forecasts, Narayanan said he saw "downside risk as limited" because of "still lagging Colombian production and disease-related problems in Central America and Mexico."The Institute of Coffee of Costa Rica estimates that the latest outbreak may halve the 2013-14 harvest in the worst affected areas of the nation, according to Nature, a weekly scientific journal.

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This outbreak is "the worst we've seen in Central America and Mexico since the rust arrived" in the region more than 40 years ago, the publication reported, citing John Vandermeer, an ecologist at the University of Michigan in Ann Arbor, who has received "reports of devastation in Nicaragua, El Salvador and Mexico."

Coffee rust - borne by the fungus hemileia vastatrix - is the most "economically important" coffee disease in the world, according to the American Phytopathological Society (APS), a scientific organization which studies the control of plant diseases.

"Even a small reduction in coffee yields or a modest increase in production costs caused by the rust has a huge impact on the coffee producers, the support services, and even the banking systems in those countries whose economies are absolutely dependent on coffee export," the APS said on its website.