Coffee Advances to 25-Month High on Deficit Forecast

Apr 11, 2014 10:48 am ET

(Corrects to remove Brazil weather forecast in second and 13th paragraphs in story published yesterday.)

April 10 (Bloomberg) -- Coffee futures rose to a 25-month high as concerns mounted that the global market will swing to a deficit after a drought in the first quarter ravaged crops in Brazil, the world’s biggest producer and exporter.

In the year starting Oct. 1 in most countries, world production will trail demand by 7.1 million bags, Marex Spectron, a London-based brokerage, said in a report. That would mark the first shortfall in five years, U.S. government data show.

Arabica futures have surged 88 percent this year, the biggest gain among 24 raw materials tracked by the Standard & Poor’s GSCI Spot Index. The rally may boost costs for the premium-quality beans at Starbucks Corp. and J.M. Smucker Co., the maker of Folgers, the best-selling brand in the U.S.

“Concerns about the supply outlook are deepening,” Jack Scoville, a vice president for Price Futures Group in Chicago, said in a telephone interview. “This problem is probably going to last more than one season.”

Arabica coffee for May delivery climbed 3.1 percent to settle at $2.084 a pound at 1:31 p.m. on ICE Futures U.S. in New York. Earlier, the price reached $2.10, the highest for a most- active contract since Feb. 14, 2012. The commodity rose for the sixth straight session, the longest rally in two months.

Trees Starved

Brazil’s crop prospects may suffer for “at least three years,” Judy Ganes-Chase, the president of J. Ganes Consulting in Panama City, Panama, said in an e-mail. “The trees will not be able to immediately rehydrate after being starved of nourishment. Trees will also be more susceptible to disease, and there will be things that are not apparent now that will manifest down the line.”

In 2013, futures dropped 23 percent, capping a three-year slump of 54 percent. The rout was the longest since since 1993 amid bumper crops in Brazil. That prompted many growers to curb investments and cut fertilizer use, while Central American harvests have been hampered by leaf-rust disease.

“There’s no problem with physical availability in calendar year 2014, but significant risks threaten 2015-2016,” Marex said, citing an El Nino weather event that may soak Brazil by mid-year and leaf rust.

Stockpiles of robusta coffee monitored by London’s NYSE Liffe have fallen to the lowest since at least 2002.

Robusta futures for July delivery climbed 1.2 percent to close at $2,158 a metric ton (97.89 cents a pound). This year, the price has gained 28 percent. The beans are used in instant coffee.

The arabica premium to robusta rose 4.9 percent to $1.1052 a pound, the highest since March 5, 2012, data compiled by Bloomberg show.

The premium has more than tripled this year.

In the previous two seasons, the accumulated global coffee surplus was 9.65 million bags, Marex said.

A bag weighs 60 kilograms or 132 pounds.