Arabica Coffee Leaps Higher on Persistent Dryness in Brazil

Alexandra Wexler

  NEW YORK--Coffee prices posted the biggest one-day gain in almost a decade Tuesday after weekend

rains in Brazil did little to ease dry conditions in growing areas, fueling concerns about supplies

from the world's largest producer.

  Arabica coffee for delivery in March rose 9.1% to $1.5265 a pound on the ICE Futures U.S.

exchange, while the more actively traded contract for May delivery closed up 8.8% at $1.5485 a

pound. Both contracts had the largest percentage gain since November 2004 and the highest settlement

since Jan. 18, 2013.

  Hot, dry weather in Brazil has been interfering with the development of coffee cherries, the fruit

that surrounds the seeds that are harvested and roasted as coffee beans. Growers and traders had

hoped rainfall over the weekend would increase moisture levels for the coffee trees, but it was

minimal.

  "Ten percent of the crop is certainly beyond repair" at this point, said Shawn Hackett, president

of brokerage and consulting firm Hackett Financial Advisors in Boynton Beach, Fla.

  Arabica futures will likely rise to $2 a pound in the next few weeks, said Mr. Hackett, who placed

futures and options bets on rising coffee prices throughout January. Coffee prices last traded above

$2 in March 2012 and are up 40% this year.

  The dry spell has many traders and investors reducing their coffee forecasts as they worry about

production losses in Brazil, the source of one-third of the world's coffee. In November, many

analysts had forecast the Brazilian crop would be a record for the third consecutive year. But now

some analysts and investors are saying global production could fall short of demand this season.

  "We're definitely going to be in a deficit" because of the reduced production in Brazil, Mr.

Hackett said.

  January and February have been the driest months in Brazil in 30 years, according to Somar

Meteorologia, a Sao Paulo-based private weather service. Coffee trees need at least 20 inches of

rain over the first three months of the year to develop normally, but the regions have received

between four and six inches so far, Somar said.

  "We may well be on our way to potentially catastrophic losses," said Sterling Smith, a futures

specialist at Citigroup in Chicago.

  About 1 1/4 inches of rain or less have fallen on the coffee-growing areas over the last four

days, according to weather forecaster DTN, and the outlook for the next five days is for continued

above-normal temperatures and limited rainfall.

  "We have to expect to see a lot of volatility (in coffee prices) in the next week or so" until

more is known about the crop damage, said Hernando de la Roche, senior vice president at INTL

FCStone in Miami.

  This is the seventh session this year that arabica futures have had a 4% or larger move, with six

of them as gains. At this point in 2013, there had been one such move.

  However, with the rapid rise in prices, a pullback in the market could be imminent, some traders

said.

  "I still feel like everyone's just running in, and when it finally falls, it will fall hard," said

Hector Galvan, senior market strategist at RJO Futures in Chicago. "It would be hard for me to think

we're taking coffee to $2 over the next month without having concrete news" on what the damage has

been in Brazil.

  Growers are likely to begin evaluating how much damage has been done at the end of this month,

when the coffee cherries are more developed. The cherries could be smaller than usual, or they could

fall from the trees prematurely, due to the lack of moisture, analysts said.

  Raw-sugar prices also rallied Tuesday on the persistent hot, dry weather in the No. 1 grower and

exporter of the sweetener.

  Brazil's 2014 sugar-cane harvest will be reduced by at least 36 million tons because of the

unusually dry weather at the start of the year, industry group Unica said Monday. That would leave

production on par with the previous season.

  Raw sugar for delivery in March on the ICE Futures U.S. exchange ended 3.4% higher at 16.16 cents

a pound Tuesday, the highest settlement since Jan. 2. The contract for delivery in May closed 3.2%

higher at 16.50 cents a pound.

  In other markets, cotton for delivery in March closed up 0.4% at 87.91 cents a pound, and the May

contract ended 0.5% higher at 89.48 cents. March-delivery cocoa settled at $2,928 a ton, down 0.2%

on the day, while the May contract settled 0.3% lower at $2,959 a ton. Orange juice for delivery in

March ended down 0.5% at $1.4365 a pound, and May closed at $1.4445 a pound, down 0.4%.