Coffee Caps Biggest Rally in 15 Months on Brazil Crop Concerns

Jan 06, 2014 3:11 pm ET

Jan. 6 (Bloomberg) -- Coffee futures capped the biggest three-session rally in more than 15 months on concern that global supplies will tighten as production may be lower than expected in Brazil, the world’s biggest grower.

Consumption will top supplies for the first time in three years in the season that starts Oct. 1 in most countries, according to Volcafe, the coffee unit of commodities trader ED&F Man Holdings Ltd. Brazilian farmers will gather 51 million bags in 2014, below production potential of 60 million bags the company projected in November and 57.2 million reaped in 2013.

Coffee futures sank 23 percent in 2013, the third straight loss and the longest run of annual declines since 1993. Prices fell partly on expectations for a bumper crop in Brazil and amid surging output in Colombia, the second-largest grower of arabica beans. The glut helped cut costs for Starbucks Corp. and Green Mountain Coffee Roasters Inc.

In Brazil, “trees have been stressed by the multiple flowerings the past two years, and the excess pruning done by growers will reduce potential,” Sterling Smith, a futures specialist at Citigroup Inc. said in a telephone interview. “We are no longer bearish on coffee, and we now hold a neutral to bullish stance.”

Arabica coffee for March delivery jumped 4 percent to settle at $1.21 a pound at 2 p.m. on ICE Futures U.S. in New York, after reaching $1.2145, the highest for a most-active contract since Aug. 20. Prices climbed 9.3 percent since Dec. 31, the biggest three-session gain since September 2012.

‘Positive Momentum’

Volcafe’s figure “is without a doubt helping” prices, Jayme Leme Neto, an export manager at Sao Joao da Boa Vista, Brazil-based Terra Forte Exportacao e Importacao de Cafe Ltda., said in an e-mail. The projection comes amid a “positive momentum” and buying from funds, which are now adjusting their positions based on the annual reweightings for commodity indexes, he said.

In the week ended Dec. 24, money managers and other large speculators cut their net-short position, or bets on a price drop, by 35 percent from a week earlier to 7,564 futures and options, the least bearish since May, government data showed.

Prices may reach $1.47 this year, as a smaller crop in Brazil may trigger a global deficit between 3 million to 4 million bags in the 2014-2015 marketing year, Citigroup’s Smith said. A bag weighs 60 kilograms, or 132 pounds.

--With assistance from Isis Almeida in London. Editors: Millie Munshi, Joe Richter