As Coffee Soars, Cup Of Joe May Get Pricier -- Commodities Report

THE WALL STREET JOURNAL - Alexandra Wexler  -  19/02/2014

Caffeine junkies should brace for bad news: Their morning jolt could get more expensive soon.

  Coffee prices on Tuesday staged their biggest gain in nearly a decade in the futures market,

taking the rise for the year to 38%.

  Prices of arabica coffee beans for delivery in March, the front-month contract, shot up 12.75

cents, or 9.1%, to a 13-month high of $1.5265 a pound on the ICE Futures U.S. exchange. That was the

biggest one-day percentage increase since November 2004.

  Roasters and analysts said higher prices at the espresso bar and in the supermarket may not be far

behind.

  Traders are pushing prices higher amid concerns that supplies from the world's biggest producer,

Brazil, could shrink significantly. Hot, dry weather in the country may have stunted the crucial

early stages of the beans' development. And hopes for a big rainfall over the weekend were dashed,

leaving trees still parched.

  It can take months for fluctuations in the $9.3 billion coffee-futures market to trickle down to

consumers. Many roasters buy beans months in advance, allowing them to weather short-term increases

in the futures market. But the magnitude of this year's rally is so great that some roasters and

coffee shops will need to raise prices in the next few weeks, some analysts said.

  Joseph Fernandes III, vice president at Socafe, a coffee roaster and trader in Newark, N.J., said

if futures prices remain at current levels for the next 15 to 30 days, he would "consider having to

reflect that in my retail price."

  "Luckily, we bought most of our coffee when prices were lower, and we have reserves," Mr.

Fernandes said.

  The volatility in the futures market presents a challenge to roasters like Mr. Fernandes because

it makes it difficult to predict what beans will cost when it is time to make another purchase.

Arabica beans are typically used in gourmet blends and prized for their mild flavor.

  Coffee drinkers won't see an immediate big increase in the cost of a cup. Higher prices are going

to be seen in retail cans and bags of coffee first. Beans make up a smaller share of the price in

coffee shops. At Starbucks Corp. stores, for example, coffee represents just 8% to 10% of cafe

operating expenses, the company has said.

  "Supplies aren't going to be totally depleted just yet," and coffee companies are used to

volatility in the price of their most-important ingredient, said Dana LaMendola, beverage analyst at

market-research firm Euromonitor International.

  Starbucks said it doesn't comment on future pricing plans or strategy, and Green Mountain Coffee

Roasters Inc. didn't immediately return requests for comment.

  For investors, coffee's rally presents a potentially lucrative, if risky, opportunity. Many are

betting that prices will rise further, though it has been a bumpy ride. This is the seventh session

this year that arabica futures have moved at least 4% or more; six of those moves were gains. At

this point in 2013, there had been one such move.

  The week ended Feb. 4 was the first time since July 2012 that money managers held more net bets

that coffee prices would rise than fall, according to the Commodity Futures Trading Commission.

  Shawn Hackett, president of brokerage and consulting firm Hackett Financial Advisors in Boynton

Beach, Fla., said he placed futures and options bets on higher coffee prices throughout January. He

predicts arabica prices will rise to $2 a pound in the next few weeks. Futures haven't traded above

that level since March 2012.

  The success of bets like Mr. Hackett's likely depends on crop reports out of Brazil heading into

the harvest season, which begins in May.

  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 predicted Brazil's crop would set a record for a third consecutive

year. Now, some analysts and investors say global production could fall short of demand this season.

  However, rain in coming days and weeks could still reduce the overall damage to this year's crop,

analysts 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 brokerage 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 weather outlook for Brazil's coffee regions calls for continued above-normal temperatures and

limited rainfall for the next five days, according to forecaster DTN.