Brazil dryness spurs 7% jump in coffee prices

Coffee prices soared 7%, on track for their best performance in five years, on concerns over dry weather in central Brazil which is provoking concerns over this year's sugar cane harvest too.

Arabica coffee for March stood 7.0% higher at 133.90 cents a pound in late deals in New York, after earlier hitting an eight-month high for a spot contract of 135.25 cents a pound.

The jump was fuelled by forecasts for further dry weather in major coffee-producing areas of Brazil, the top arabica producing and exporting country, on top of a January which according to weather service MDA was the driest in some regions in at least 15 years.

'No sign of rain'

"North eastern Brazil did see some rainfall earlier in the season," which will have supported soil moisture reserves, MDA meteorologist Kyle Tapley told Agrimoney.com.

"But further south, through Sao Paulo [state] and southern Minas Gerais did not see rainfall. These areas are probably the greatest concern."

And there was little chance of rainfall beyond light showers.

"It looks like it is going to be staying dry in coffee areas for at least 10 days, and there is no sign of rain immediately beyond that."

However, he added that the greater concern appeared to be for sugar cane, for which Sao Paulo is the core producing state, given that it has borne the brunt of dryness, rather than coffee, with at least some parts of Minas Gerais receiving rains in recent months.

According to Brazilian consultancy Somar, the Cerrado of Minas Gerais received 88% of average rains over the past two months, compared with 40-50% in the south of the state.

'May be premature'

Separately, Societe Generale analyst Christopher Narayanan also urged caution over the fundamental rationale behind Monday's rally, which adds to gains late last week too - and means that arabica coffee futures have soared some 18% in a week.

"It may be all a bit premature," Mr Narayanan told Agrimoney.com.

"There is still time for the crop to recover. It may be a bit overdone at this point."

The extent of Monday's rally reflected technical strength, with futures – after more than a year - escaping a chart downtrend, which took prices to 101.95 cents a pound in November.

"Coffee has broken out of its downtrend and has found a bit of technical buying, and probably come across some buy stops."

'Remains to be seen'

Commerzbank too flagged the potential for Brazil's coffee harvest, which begins in earnest in June, to escape severe hard,

"The dry weather is giving rise to doubts about the extremely optimistic predictions for the next crop, though it remains to be seen whether irrevocable damage will be caused or whether damage will be averted by later rainfall," the bank said.