Dry Weather in Brazil Sparks Worries About Crop Damage

Arabica Coffee Prices Rally on Renewed Production Concerns   Dry Weather in Brazil Sparks Worries About Crop Damage   By Alexandra Wexler

April 7, 2014 9:46 a.m. ET

NEW YORK—Arabica-coffee prices surged Monday on renewed concerns about dry weather damaging the crop in top grower and exporter Brazil.

The most actively traded futures reached $1.9680 a pound, the highest price since March 17, in morning trade. Arabica for delivery in May on the ICE Futures U.S. exchange was recently trading up 3.5% at $1.9145 a pound.

The impetus for the latest jump in the market, which has soared 9.7% since Thursday, was a report from Brazil's National Coffee Council. On Friday, the CNC lowered its estimate for the current harvest, which is expected to begin in May, from about 44 million 60-kilogram bags of coffee to between 40.1 million and 43.3 million bags, because of the "unexpected climate situation this year in Brazil's coffee-producing belt, with a lack of rain especially in January and February."

Those two months were the driest in Brazil in 30 years, according to Somar Meteorologia, a São Paulo-based private weather service. A lack of moisture can stunt the maturation process of coffee cherries, the fruit surrounding the seeds that are roasted to make coffee beans.

"Numbers like the ones we saw to end the week are pushing most (traders) to take the safe route and lock in long positions," said Hector Galvan, senior market strategist at RJO Futures in Chicago. "I would believe that we are quickly on our way to close above the $2 (level) and likely stay above it for some time."

Dry weather is expected to return to Brazilian coffee-growing areas through at least next week, traders and analysts said, after sporadic rains throughout March.

"The weather is turning dry and will be very, very dry until Friday or next week," said Hernando de la Roche, senior vice president at INTL FCStone in Miami.

Prices for arabica coffee, which is prized for its mild flavor and typically used in gourmet blends, surged to a more than two-year high of $2.0595 a pound on March 13, because Brazil grows more than half the world's supply. In February, prices jumped 44%, the biggest monthly increase in almost two decades. But as rains returned to growing areas, traders and investors took some profits and prices fell as low as $1.7115 a pound on March 21 before rebounding.

Now, traders are also worrying about next year's production. Brazil's CNC also lowered its expectations for the 2015 harvest to between 38.7 million and 43.6 million bags of coffee, down from an earlier estimate of 43 million to 44 million bags.

"With the damage that is being done right now, we're not going to be likely to produce a better crop next year," said Sterling Smith, a futures specialist at Citigroup in Chicago. The risk of a frost as Brazil enters its winter in June could also boost prices, Mr. Smith said.

"Any frost activity would have a larger effect (than usual), particularly on the new branch growth which is critical for next year's crop," he said.

In other markets, cocoa for delivery in May on ICE was recently less than 0.1% lower at $2,965 a ton, and orange juice for May delivery was 0.5% lower at $1.5325 a pound. Cotton for delivery in May was down 1.3% at 91.24 cents a pound, and raw sugar for May delivery was 0.6% lower at 17.25 cents a pound