Coffee reaches one-year low as Brazil rain drives price swings
By Bloomberg
If you think swings in the crude market have been bad, take a look at coffee.
After surging as much as 11 percent to 2015’s high in mid- January, rains in Brazil improved crop prospects and prices are now at the lowest in a year. Bull-to-bear market gyrations spurred by changing weather in the country, the world’s biggest producer and exporter, drove coffee to be the most-volatile commodity in the past year.
Brazil’s most-severe drought in decades damaged crops in early 2014, and traders spent the rest of the year tracking rains as prices surged 50 percent. Above-normal precipitation in the past month has replenished dry soils, according to MDA Weather Services, and moisture levels are adequate in most growing areas.
“Weather conditions are near perfect in Brazil, and there are no crop concerns anymore,” James Cordier, founder of Optionsellers.com in Tampa, Florida, said in a telephone interview. “Concerns from the drought last year were overblown. Because many trees are young, they were able to rebound and are probably going to produce nicely this year and the next one.”
Arabica coffee for May delivery tumbled 3.7 percent to settle at $1.4345 a pound at 1:39 p.m.. on ICE Futures U.S. in New York, after touching $1.4235, the lowest for a most-active contract since Feb. 18, 2014. Prices are heading for a sixth straight monthly loss, which would be the longest streak since October 2013.
Crop Estimates
Volcafe, the coffee unit of commodity trader ED&F Man, estimates Brazilian output will rise to 49.5 million bags this year from 47 million bags in 2014, the Winterthur, Switzerland- based company said last week. A bag weighs 60 kilograms, or 132 pounds.
While futures fell 19 percent in the past 12 months, the commodity would need to drop another 23 percent before erasing last year’s drought-driven gains. Higher costs forced some coffee sellers to increase prices.
In December, J.M. Smucker Co., the maker of Folgers, announced an 8 percent price increase on K-Cup packs effective Jan. 5. The same month, Kraft Foods Inc. boosted retail prices for some coffee brands by 9 percent, citing gains in raw materials and higher operating costs.
As rains improve crop prospects in Brazil, output is also set to climb in Colombia, the second-largest supplier of arabica beans. Production will increase as much as 5.8 percent this year to the highest since 2008, according to Colombia’s main exporter group.
For the global harvest season that starts in October, output will rise to 152.8 million bags from 142.2 million a year earlier, Keith Flury, head of Volcafe’s coffee research, said Feb. 22.
The weak Brazilian real, trading near 10-year lows against the dollar, “also continues to weigh on the market,” said Cordier of Optionsellers.com. Exports in South America are priced in the U.S. currency, and a weaker real encourages more selling.