More Expensive Cup of Coffee? Beans Soar to 2 1/2 -Year High

Alexandra Wexler

     The sharply rising price for coffee beans means that morning cup of joe could soon get more

expensive--again.

     Arabica-coffee prices surged to the highest level in 2 1/2 years on Monday as dry weather in

Brazil raised concerns about next year's crop.

     Coffee prices have nearly doubled this year as a lack of rainfall clipped output from the

world's biggest coffee grower and fueled worries about how already weakened trees will fare next

season. Brazil is the source of one-third of the world's coffee and about half of the world's

arabica beans, which are prized for their mild flavor and used in gourmet blends..

     Consumers were already hit with a wave of price increases this summer by big roasters like

Starbucks Corp. and Folgers maker J.M. Smucker Co. Now, traders and investors say the return of dry

weather in Brazil could keep prices high for years to come, particularly if the perennial trees are

damaged.

     "Brazil is to the coffee market what Saudi Arabia is to the oil market," said Harish Sundaresh,

commodities strategist at Loomis, Sayles & Co., a Boston investment adviser that manages about $220

billion. "If Brazil falls off a cliff it would definitely get the market worried."

     He has placed bets in the futures market that benefit from rising coffee prices and expects

arabica prices to trade between $2 and $3 a pound next year.

     Arabica coffee for delivery in December was recently up 7.1% at $2.2120 a pound on ICE Futures

U.S., on track to end at its highest level since January 2012. Futures were earlier up as much as

9.2%.

     In June, J.M. Smucker Co. became the first major U.S. roaster in nearly three years to lift

coffee prices, announcing an average 9% increase in the cost of popular supermarket brands such as

Folgers and Dunkin' Donuts. Kraft Foods Group Inc. and Starbucks Corp. followed suit with their own

price increases.

     "If there isn't any rain, then certainly Starbucks and those guys will be feeling some pain,"

said Jonathan Camarda, executive wealth manager at Camarda Wealth Advisory Group. Mr. Camarda, who

manages about $210 million, is considering adding to shares he first bought in August in the iPath

Pure Beta Coffee exchange-traded note. "You're looking at definite further upside [for prices]."

Smucker, Starbucks and Kraft could not be immediately reached for comment.

     Price increases may not immediately reduce demand, however. American consumers are unlikely to

cut back on coffee consumption until prices rise by at least 30%, said Thom Blischok, chief retail

strategist at Strategy&, a consulting firm formerly known as Booz and Co. He said manufacturers and

retailers are likely to change the size of coffee packaging to stave off further price increases.

     "Coffee is one of these American staples," Mr. Blischok said. "Giving up their cup of coffee is

going to be pretty tough to do."

     The recently ended coffee harvest was Brazil's smallest in three years, after the main growing

region experienced its worst drought in decades in the spring. In July, unseasonable rains caused

some trees to flower early for the next year's crop. But dry weather followed, causing some of those

trees to drop their flowers, and others to not flower at all. That will prevent development of the

coffee cherries that contain the seeds that are roasted to make beans.

     "With no significant rainfall in September, an alarming situation with substantial losses for

2015 is projected," Brazil's National Coffee Council, a growers' group, said last week.

     Next year is an off-year in Brazil's two-year coffee cycle, meaning production would already

have been lower without the unusual weather. Global coffee production could fall short of demand in

the season that began Oct. 1 by the largest amount since the crop year ending in 2006, the

International Coffee Organization said in July.

     "Brazil is on target to potentially have two deficit years," said Brian Kurtzer, senior

portfolio manager at Durham, N.C.-based Verity Asset Management, which manages about $410 million.

"The path of least resistance is still on the upside."

     Arabica coffee is the only commodity that Mr. Kurtzer is betting on to increase in price, he

said. He bought shares in the iPath Dow Jones-UBS Coffee Subindex Total Return exchange-traded note,

an investment product that tracks coffee prices, in August and added to the position last month.