Withering Coffee Crop Spurs Investors to Trim Bets on Price Fall

2016-02-01 08:48:48.634 GMT

(Bloomberg) — Dry weather across coffee-producing regions
is starting to diminish the outlook for this year’s crop and
forcing investors to trim their bets that prices will fall.
Below-average rain is forecast for the next 10 days in
Brazil’s Espirito Santo state, a region that saw yields decline
over the past two years, according to MDA Weather Services. In
Colombia, growing areas got as little as 10 percent of normal
precipitation during the past month. The countries are the
world’s top growers of arabica coffee.

Prices have rebounded almost 5 percent from a two-year low
last month. The lingering El Nino weather pattern is bringing
dry conditions as inventories are already depleting in Brazil,
the biggest exporter. At the same time, the U.S. Department of
Agriculture forecasts that world demand will climb to a record
this season. Hedge funds and other speculators cut their bearish
wagers for the first time in three weeks.

“Coffee is one of those commodities where the demand is
very solid, and its price depends to a certain extend on what
the harvests have been doing,” said Frances Hudson, an
Edinburgh-based global thematic strategist at Standard Life
Investments, which oversees $393 billion. While El Nino occurred
most of last year, “its impact will be felt for a while longer,”
she said.

Retreating Bears

Arabica coffee added 0.3 percent last week to $1.1635 a
pound on ICE Futures U.S. in New York. Prices climbed for six
straight sessions through Thursday, the longest rally since
June. The net-short posit ion in futures and options decreased to
23,251 contracts in the week ended Jan. 26, according to U.S.
Commodity Futures Trading Commission data released three days
later. The figures compared with 25,319 the prior week.
Arabica is primarily grown in Latin America and brewed by
specialty companies including Starbucks Corp. Robusta beans,
used in instant coffee, are harvested in Asia, Latin America and
parts of Africa.

Global production will trail demand by 3.4 million bags in
the 2015-16 season, Marex Spectron Group, a London-based
brokerage, said in January. That’s up from a November estimate
of 2.79 million bags. A bag weighs 60 kilograms (132 pounds).
Brazil’s stockpiles will fall to between 4 million and 6
million bags, the Coffee Council estimates. That’s near a record
low. The supplies are set to decline because the country’s
production hasn’t been lar ge enough to meet domestic and export
demand, Paulo Andre Colucci, a spokesman for the Brasilia-based
group, said last week by e-mail.

Inventories are sliding elsewhere too. Stockpiles at
warehouses monitored by ICE Futures have fallen to the lowest
since 2012. Strong cash prices are discouraging suppliers from
delivering beans to the exchange, said Hernando de la Roche,
senior vice president for INTL FCStone in Miami.

Trend Reversal

The tightening supply situation is a reversal from 2015.
Coffee prices tumbled 24 percent last year, the biggest annual
drop since 2012. Slumping currencies in Brazil and Colombia
spurred growers to sell from inventories and increase shipments,
which fetched dollars in return. Declining local currencies are
also reducing production costs and allowing farmers to increase
use of fertilizers and other plant aids.

While news of tightening su pplies, including in Colombia,
can help stem recent declines for futures, declining local
currencies will encourage exports and limit price gains, said
Gillian Rutherford, who helps oversee about $13 billion as a
commodities portfolio manager at Pacific Investment Management
Co. in Newport Beach, California.

To contact the reporter on this story:

Marvin G. Perez in New York at mperez71@bloomberg.net
To contact the editors responsible for this story:
James Attwood at jattwood3@bloomberg.net
Millie Munshi, Steve Stroth