Coffee at 26-Month High as Brazil Drought Raises Volatility

Apr 23, 2014 4:21 am ET

(Updates price in sixth paragraph.)

April 23 (Bloomberg) -- After surging 19 percent the past four weeks, coffee extended its ascent.

Futures jumped to the highest in more than two years yesterday, after drought damage in Brazil prompted Volcafe Ltd. to cut its outlook for the crop in the South American country, the world’s top grower and exporter.

The worst Brazilian drought in decades ravaged plants earlier this year, and production of arabica beans will be 18 percent less than projected, Volcafe, a unit of commodity trader ED&F Man Holdings Ltd., said in an e-mailed report yesterday. Coffee futures jumped as much as 8.3 percent, driving volatility to the highest since 2000.

“People are realizing every day that there’s damage, and that the losses will be hard to quantify,” Hernando de la Roche, a senior vice president at INTL FCStone in Miami, said in a telephone interview. “Traders are jittery because of the uncertainty about the Brazilian harvest and what it would mean to world supplies.”

The global harvest, which includes the robusta variety, will fall short of demand by 11 million bags, Winterthur, Switzerland-based Volcafe estimates. That would mean a world deficit about the size of production in Colombia, the second- largest supplier of the premium arabica beans, which are favored by Starbucks Corp. A bag weighs 60 kilograms, or 132 pounds.

Arabica coffee for July delivery soared 7.1 percent to settle at $2.134 a pound yesterday on ICE Futures U.S. in New York. Earlier, the price reached $2.157, the highest for a most- active contract since Feb. 14, 2012. Futures traded at $2.163 by 4:17 p.m. in Singapore today.

Rising Volatility

Prices have surged 95 percent this year after the Brazilian drought. Now, excess rain threatens to slow the nation’s harvest and reduce crop quality, Sao Paulo-based Somar Meteorologia said yesterday.

Expanding drought damage has prompted analysts to lower harvest estimates. Coffee’s 60-day volatility was near 61, the highest since 2000.

Crop losses may rise as high as 35 percent in southern Minas Gerais, the leading producer in Brazil, Christian Wolthers, the president of Wolthers Douque, an importer in Fort Lauderdale, Florida, said last week after a tour of the region.

Price gains increase the chances for higher costs for companies including Keurig Green Mountain Inc. and J.M. Smucker Co., maker of Folgers, the best-selling U.S. brand.

Coffee is “hyper bullish,” Hackett Financial Advisors Inc. said in a report dated April 20.

The 2015-16 global deficit may be at least 10 million bags, and “all-time high prices are very likely to be seen as a result,” said Hackett in Boynton Beach, Florida.

The arabica premium to robusta, used in instant coffee, surged 13 percent to $1.1561 a pound, the highest since Feb. 21, 2012, according to data compiled by Bloomberg. Robusta, mostly grown in Asia, advanced 0.9 percent to $2,156 a metric ton on NYSE Liffe in London yesterday and traded at $2,190 today.