Brazil's coffee belt grapples with rare threat: dry heat

Feb 12 (Reuters) - In Brazil's coffee belt, frost has long been the biggest risk for farmers and commodities traders alike. But after years of migrating to warmer regions, farmers here now find themselves scrambling to overcome an unusual phenomenon: blistering heat.

January was the hottest and driest month on record in much of southeastern Brazil, punishing crops in the country's agricultural heartland and sending commodities prices sharply higher in global markets. As signs emerged that the world's largest coffee crop was withering, futures prices shot up 26 percent over a seven-day stretch to a nine-month high.

The heat wave has thrust many Brazilian coffee farmers into the unknown. January, typically the wettest month for the coffee belt, caught most farmers off guard, leaving them with few options but to count their losses.

A few, such as Marcio Diogo, a third generation coffee farmer in Espirito Santo do Pinhal in Sao Paulo state, are scrambling to install irrigation lines to limit those losses, which may have reached 30 percent of output on his 75-hectare (185.2-acre) farm, according to his count.

"My grandfather started here 80 years ago ... never seen a January like this," Diogo said walking through a field of 25,000 freshly planted coffee trees that he ordered six months ago.

"I've had to water this field six times by tractor," he went on, something he normally doesn't have to do.

The drought couldn't come at a worse time for Diogo and other farmers, who have struggled with weak global coffee prices over the past two years. It's still unclear whether the recent spike in prices, in part driven by Brazil's drought, will eventually offset the loss in output from the dry weather.

Celso Scanavachi, an agronomist at the local coffee cooperative Coopinhal, said farms in the region got only 10-12 centimeters (3.9-4.7 inches) of rainfall in January, less than half the month's average precipitation.

Espirito Santo do Pinhal, nestled along the border between two of Brazil's biggest arabica growing states, Minas Gerais and Sao Paulo, is not alone.

Two hours to the north in southern Minas Gerais, which produces 25 percent of Brazil's coffee crop, between 4.5 and 8.6 centimeters of rainfall fell last month, when 26.5-30.1 centimeters are average. No doubt, 2014 will go down as the worst drought in recent history in Brazil's coffee belt.

The impact, however, is still hard to gauge. The government estimated the crop at up to 50 million 60-kg bags before the drought, while market estimates put it at 60 million bags. Future estimates will likely fall for several months as analysts and farmers get a more precise understanding of the damage.

"It's clear there will be losses but nobody knows yet how big because this has never happened. We are in uncharted territory," Lucio Dias said, a grower and sales director at Cooxupé, Brazil's biggest coffee cooperative.

Whatever the damage, the world is unlikely to run out of coffee anytime soon, thanks to the large stockpiles of beans amassed in recent years.

RELIEF ON THE HORIZON

Some short-term relief appears to be on its way. A cold front moved over southern Brazil on Wednesday and should bring some moisture to agricultural crops in the coming days, though widespread rainfall in the coffee belt is not expected until Feb. 20.

Still, it's unlikely the rains will be heavy enough to reverse the damage to the crops or make up for the rainfall lost in January and early February.

"Those are the peak months for the rainy season and they are over," said Celso Custodio, a senior meteorologist at forecaster Somar Meteorologia.

To be sure, Brazil's coffee belt has suffered droughts before, but rarely in January, when the Southern Hemisphere summer heat is offset by tropical downpours almost daily. The dry season runs from April through September, and can sometimes stretch into November but temperatures are lower then.

Volatility in coffee futures prices has traditionally come with frost, hints of which can send contract prices up 10 percent in a matter of minutes.

The cold snaps of 1975 and 1999, the worst in recent history, prompted farmers to migrate from the southernmost growing regions most exposed to polar air blasts in winter, into the warmer states of Minas Gerais, Bahia and Espirito Santo.

Subsequently, frost has had less of an impact on the coffee belt since. For more than a decade, coffee has only traded mildly on weather threats.

But this year's heat wave has changed that. Because a majority of Brazil's coffee farms are heavily reliant on rainfall, the first signs of a serious drought put markets on edge.

Coffee futures prices in New York started January at just under $1.12/lb and now are pushing $1.41/lb.

"Although irrigation is common in areas like the Cerrado or Espirito Santo or western Bahia where it is more arid, nobody has invested in it in South Minas because it has always rained in January here," Dias, of Cooxupé, said.

TALLYING THE LOSSES

Accurately estimating the losses to the entire crop in Brazil, the world's main supplier of natural - or sun-patio cured - arabicas, is a monumental task fraught with complexity.

Overseeing a crew installing an irrigation line to a slope of three-year-old trees that are particularly at risk to dry weather due to their less developed roots and foliage, Diogo surveyed the young trees deceptively full of coffee fruit.

He reached down and stripped a bow full of unripe coffee fruit and cut cross sections through several of the fruit with his pocket knife showing voids inside where pale green beans would normally be forming if there had been rain.

After testing coffee fruit on several trees of varying ages, Diogo estimated that he would harvest less than 40 bags a hectare this year, if he's lucky, and not anywhere close to the 65 bags a hectare he brought in last season.

"The flowering of this crop was nearly perfect. Our hopes were high," Diogo said as he pinched coffee cherries to test if they had succumbed to the drought.

Coffee trees are commercially productive for a little more than 25 years but must then be ripped out and replanted. The youngest trees, or about 25 percent of Brazil's crop, are most at risk to hot, dry weather. As much as 50 percent of the beans on trees up to two years old in Espirito Santo do Pinhal are likely lost without hope of recovery, even if rains came today, according to Scanavachi, the agronomist.

Older trees of more than 10 years showed only minor losses of less than 10 percent to the drought. Most trees, young and old, showed very little growth in their branches and foliage, which will hold and shade the fruit in the coming crop.

"Trees have lost productive potential for the next year, too," Scanavachi said.