Coffee Drops Most in Three Weeks as Brazil Rains May Aid Crops

Apr 15, 2014 7:12 pm ET

April 16 (Bloomberg) -- Coffee futures dropped the most in more than three weeks as a forecast for showers boosted prospects for crops damaged by the worst drought in decades in Brazil, the world’s biggest grower and exporter.

In the next six to 10 days, above-normal rainfall is expected in much of Sao Paulo, Rio de Janeiro, parts of Espirito Santo and central and southern Minas Gerais, MDA Weather Services in Gaithersburg, Maryland, said in a report April 14. Drought in January and February reduced crop prospects, boosting prices 76 percent this year.

The drop yesterday highlights increasing swings in the coffee market. After prices reached a two-year high in mid- March, forecasts for rain prompted the biggest two-day selloff since 2010, followed by a rebound to a new high on April 11. The 60-day volatility for the most-active contract rose to 57.08, the highest since at least 2004. The prospect of an El Nino weather pattern is adding to uncertainty, threatening a deluge that may bring too much rain and hurt output next season.

“Everybody is keeping an eye on the Brazilian crop,” Julio Sera, risk management consultant at INTL FCStone in Miami, said in a telephone interview. “This is causing strong price swings.”

Arabica coffee for July delivery fell 6 percent to settle at $1.9505 a pound on ICE Futures U.S. in New York.

Put Options

Put options giving owners the right to sell June futures at $1.95 jumped 75 percent to 10.15 cents. An estimated 2,053 contracts traded, the most-active coffee option yesterday on ICE.

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 this month. That would mark the first shortfall in five years, U.S. government data show.

This year’s unexpected drought comes after prices in 2013 capped the longest stretch of annual declines in two decades.

Estimates for Brazil’s output this year ranged from as high as 56.5 million bags to as low as 46 million last month. The gap is almost the size of the expected production in Colombia, the second-biggest supplier of arabica beans, which are favored by Starbucks Corp.

A bag weighs 60 kilograms, or 132 pounds.