Coffee Poised For Bear Market As Rains Boost Brazil Crop
Published on Jun 3 2014 9:36 AM in Drinks
Coffee futures are heading for a bear market after rains eased drought damage for plants in Brazil, the world’s top producer and exporter.
Growers in the nation will harvest 50.5 million bags in the season that starts this year after rains in March and April helped crops recover from a dry spell in the first quarter, according to Mercon Group.
That’s higher than the 49.5 million estimated by the US Department of Agriculture last month.
Futures tumbled 21% from a two-year high in April partly as rising American stockpiles helped cushion the impact of production losses after Brazil’s drought. Mercon said in a report to clients that it was “pleasantly surprised” that crops in areas worst hit by the dry weather are recovering.
“The feeling is that the damage from the drought was overstated, and also the inventories are ample,” Hernando de la Roche, a senior vice-president at INTL FCStone in Miami, said in a telephone interview. “There is also less buying in the northern hemisphere during summer months.”
Arabica coffee for July delivery fell 2.9% to settle at $1.7235 a pound at yesterday on ICE Futures US in New York. A close at $1.7184 would be 20% below this year’s settlement high of $2.148 on April 24, meeting the common definition of a bear market.
Prices surged 56% this year as Brazil’s drought made coffee 2014’s best-performing commodity. An unprecedented three months with almost no moisture prompted Marex Spectron to forecast the first global shortage in five years. The Standard & Poor’s GSCI index of eight agricultural commodities increased 10% this year.
Ipanema Coffees, a supplier of beans to Starbucks Corp., expects yields for its crop to drop by as much as 40%.
“It’s a mistake to suppose that coming rains will solve the problems we’ve had,” Washington Rodrigues, the president and chief executive officer of the Alfenas, Minas Gerais-based Ipanema, said last week. “Once vegetative growth is lost, you don’t recover it.”
Hedge funds are paring expectations that this year’s rally will continue. Money mangers cut their coffee net-long position by 3.4% to 39,482 contracts as of May 27, the second decline in three weeks. Prices slumped 14% last month, the most since 2011.
Stockpiles of unroasted beans in the U.S., the world’s biggest consumer and importer, rose 7.6% in April from a year earlier, the New York-based Green Coffee Association said May 15.