Coffee prices on the commodities market jumped 10% on Tuesday, to 1.5665 per pound in New York. On Thursday, the price per pound reached the highest point in about 16 months at $1.7750. Analysts reacted to the announcement of precipitation forecasts below seasonal averages in Brazil, the largest producer of coffee in the world.
However, the rally in arabica coffee futures showed signs of tiring amid talk that the surge in prices this year appears “excessive”, given that buyers look set to be able to find supplies despite Brazil‘s drought.
Usually during this time of year, the delicate arabica coffee plants in the mountains of Brazil, where most of the world’s coffee comes from, are maturing. White, fragrant flowers have appeared, followed by cherry-like fruit, each containing two seeds: arabica coffee beans, the most popular in the world.
But last month, the worst drought in decades hit Brazil’s coffee belt region, destroying crop yields. The drought is historic, with more than 140 cities in Brazil rationing water. The country’s leading newspapers reported that some neighborhoods are only receiving water every three days.
Arabica coffee prices have surprised the market by reversing direction with a 70 percent jump up from November’s 4-1/2 year low, after sliding for around 2-1/2 years on surplus supplies. Robusta coffee futures on Liffe were firm with May closing up $2, or 0.1 percent, at $1,959 a tonne after peaking earlier at $2,019, the highest level for the second month since May 2013. The contract moved in more than a $100 range with its session low at $1,914.
The coffee market is coming off of a surplus year, so near-term supplies of bean are more than ample. However, the unusually hot, dry conditions could turn the tables, resulting in a supply deficit in the upcoming crop year. Farmers are hoping that there will be enough rain in the next 15-20 days before they reassess the health of crops again. The dry season in Brazil runs from April to September, making it imperative that coffee crops receive moistures over the next month and a half.
Even before the drought began, though, there were concerns that there would be a global deficit of coffee. At the beginning of the year, a closely-watched report by a commodities trading firm noted that the global coffee market could face a shortage for the first time in three years. The report predicted that coffee supplies will be about five million bags lower than consumption for the 2014-15 season.
For Commerzbank, “the scale of the price rise in recent weeks appears excessive,” adding that “we expect prices to fall during the course of the year”.
Separately, Macquarie acknowledged that Brazil‘s “weather situation is unprecedented and it is difficult to assess how much damage has been done to the coffee crop. “But at current high levels, we believe coffee prices look overbought,” the bank added. “Even allowing for Brazilian crop losses, we still don’t see a market in deficit,” and with some rains on the horizon “we would expect prices to consolidate, as further [crop] losses are stemmed”.