Coffee Tops $2 in Surge to Two-Year High on Brazil Drought Woes

By Marvin G. Perez  Mar 5, 2014 3:40 PM PT

Photographer: Paulo Fridman/Bloomberg

Coffee plants, some with brown leaves caused by a recent drought, stand at the Sao... Read More

Coffee futures topped $2 a pound in a surge to a 24-month high as drought conditions that started in January eroded prospects for crops in Brazil, the world’s top producer and exporter.

Rain will ebb after a cold front this week in Brazil’s coffee areas, Somar Meteorologia inSao Paulo said yesterday. The southeast including Minas Gerais, the top producing state, is having the driest summer since 1972, the National Institute of Meteorology in Brasilia has said. Wolthers Douque, a U.S. import company, cut its crop forecast this year by 10 percent.

Futures for arabica beans, favored by specialty companies such as Starbucks Corp. (SBUX), have surged 83 percent this year, the most among the 24 raw materials tracked by the Standard & Poor’s GSCI Spot Index. Last year, coffee tumbled 23 percent in the third straight annual loss, the longest slump since 1993, amid Brazil’s bumper crops.

“The limited rains in Brazil have made the size of this year’s crop a moving target,” Robbert Van Batenburg, a director of market strategy at Newedge Group SA in New York, said in a telephone interview. “It’s not easy to just turn on the switch and start producing more.”

Arabica coffee for May delivery jumped 9.1 percent to settle at $2.024 a pound yesterday on ICE Futures U.S. The price reached $2.041, the highest for a most-active contract since March 2012.

Photographer: Dado Galdieri/Bloomberg

Brazil accounts for 37 percent of global coffee output, including 46 percent of arabica.

Next year, Brazil’s output may fall as low as 40 million bags from 47.7 million this season, Christian Wolthers, the president of the Fort Lauderdale, Florida-based Wolthers Douque, said yesterday in a report. He has traded coffee for more than three decades.

Speculative Money

The leaf rust disease reduced yields in the past two years in Central America, compounding supply concerns. In the season starting Oct. 1 in most countries, global demand may outpace production by 6.5 million bags, compared with a surplus of 4.3 million a year earlier, according to Volcafe Ltd. in Winterthur, Switzerland. A bag weighs 60 kilograms, or 132 pounds.

Money managers and large speculators boosted bets on a price rally in the week ended Feb. 25 to the highest since May 2011, government data showed on Feb. 28 .

“Once you have a commodity like this running away, you then get roasters coming in to hedge their needs,” said Newedge’s Van Batenburg. “This is also attracting a lot of speculative money.”

Arabica Premium

The arabica premium to robusta beans, used mainly in instant coffee, has more than tripled this year to $1.0873 a pound, the highest in two years.

Robusta futures for May delivery slid 0.6 percent to $2,065 a metric ton (93.67 cents a pound) onLondon’s NYSE Liffe. The price has climbed 23 percent this year.

Raw-sugar futures for May delivery gained 2.8 percent to close at 18.23 cents a pound on ICE. Earlier, the price reached 18.28 cents, the highest since Nov. 6. Brazil is the top producer and exporter.

“The rain has the same implication for sugar,” James Cordier, the founder of OptionSellers.com in Tampa, Florida, said in a telephone interview. “But there’s a cap on sugar prices because there’s other producers in the world. There isn’t a cap on the price of coffee because Brazil produces such a large percentage.”

Brazil accounts for 37 percent of global coffee output, including 46 percent of arabica, with the latest share of sugar at 22 percent, USDA data show.

To contact the reporter on this story: Marvin G. Perez in New York at mperez71@bloomberg.net

To contact the editor responsible for this story: Millie Munshi at mmunshi@bloomberg.net