Coffee, Sugar Rally on Dry Weather in Brazil

Alexandra Wexler

     Sugar and coffee prices rallied Friday on worries that unusually dry weather in Brazil could

crimp output in the world's biggest producer of both crops.

     The lack of moisture could hurt yields of sugar cane and coffee trees in Brazil, raising

questions about whether global sugar and coffee supplies will be tighter than expected. Current

forecasts show global production outstripping demand in both markets this year.

     "We've had some dry weather, and that's getting people more and more worried about the

production estimates," said Chris Narayanan, head of agricultural commodities research at Société

Générale in New York.

     Coffee futures were recently up 3.8% at $1.2450 a pound, the highest level since Aug. 16 on the

ICE Futures U.S. exchange. Raw-sugar futures were recently 3.7% higher at 15.56 cents a pound, a

two-week high for the most actively traded contract and up from Wednesday's 3 1/2-year settlement

low of 14.74 cents.

     "The drier-than-normal trend which began in December and worsened in January looks set to

continue as we move into February," said Michael McDougall, senior vice president at brokerage

Newedge in New York.

     Parts of Brazil are experiencing high temperatures. The unusually hot weather and the lack of

rains in some areas of the states of São Paulo and Minas Gerais has coffee farmers concerned, the

University of São Paulo's Center for Advanced Studies in Applied Economics said this week.

     The dry weather comes at a critical time for both crops. The sugar cane has been planted and

the arabica trees have started to produce cherries, the fruit that contains the beans used to make

coffee. Cane produces less sugar and coffee trees get stressed and can drop cherries if they don't

receive enough moisture.

     In addition, some trading houses have warned that Brazil's coffee crop could be smaller than

expected because the steady slide in prices for more than two years has encouraged growers to

heavily prune their trees and scale back on fertilizer.

     Still, world sugar production is expected to outpace demand by 4.7 million metric tons in the

year ending Sept. 30, according to the International Sugar Organization, and some traders expect

Brazil to reap a record coffee crop this year, even if some growers cut back.

For now, traders are focusing on the short-term outlook.

     Sterling Smith, a futures specialist at Citigroup in Chicago, said concerns about the weather

in Brazil over the next month could help arabica-coffee prices climb higher. "If February proves to

be unusually dry, we will see production losses and this should be supportive to prices," Mr. Smith

said.