Arabica Coffee Rises as Traders Worry About Brazil Rains

Alexandra Wexler

Investors are going back for a second cup of coffee.

     Arabica-coffee prices have risen 8.7% this week and 5.1% this year in the futures market, as

dwindling rains in Brazil, the world's largest grower, spur traders to once again bet on higher

prices. Only silver has performed better this year among the 22 commodities tracked in the Bloomberg

Commodity Index.

     Coffee was the top-performing commodity in 2014 and one of just a few to post a gain amid steep

drops in prices for crude oil, natural gas, copper and soybeans. Arabica prices jumped 50% last year

after Brazil experienced its worst drought in decades. Futures soared above $2 a pound, forcing big

roasters such as Starbucks Corp. to raise prices. Arabica is prized for its mild flavor and used in

gourmet blends.

     The market has pulled back from those highs. But investors are betting that if the rains in

Brazil's coffee-growing areas disappoint again, the market could surge back above $2 a pound in a

hurry.

     On Wednesday, arabica for delivery in March ended up 0.1% at $1.7505 a pound on ICE Futures

U.S.

     "We just receive reports about the scarcity of water across the country every day," said Harish

Sundaresh, commodities strategist at Loomis, Sayles & Co., a Boston investment adviser that manages

about $223 billion. Mr. Sundaresh bought coffee futures at the end of last year, when they fell back

below $2 a pound.

     "I think it seems like 2015 is building up to be a year where coffee prices go 40% to 50% to

the upside [again]," he said, adding that futures could easily crack $3 a pound, a level last seen

in May 2011.

     The 2014 coffee harvest in Brazil, which produces a third of the world's supply, was the

smallest in three years. This year is an off-year in Brazil's two-year coffee cycle, meaning

production would already have been lower without the unusual weather. Colombia, the world's No. 2

arabica grower, has been ramping up production, helping to alleviate some of the concerns about

global supplies. But Colombia only produces about a quarter as much coffee as Brazil.

     "For this month, we expect rain within the average--the problem will be the distribution," said

Marco Antonio dos Santos, agro-meteorologist at Somar Meteorologia, a closely watched São

Paulo-based weather forecaster. "If we only get it as localized downpours, then some areas, or even

some farms, could get less rain than they need. We'd need good rain above the average to be ideal."

     The lower production and higher coffee prices are hitting coffee companies as well as

consumers.

     J.M. Smucker Co. cut its outlook for the year in November after its Folgers coffee brand

suffered a decline in sales after it raised prices. Smucker and Maxwell House maker Kraft Foods

Group Inc. didn't return requests for comment. Starbucks declined to comment.

     "I'm kind of a little nervous about what we're going to see come May and June," when Brazil's

coffee harvest ramps up, said Joseph Fernandes III, vice president at Socafe, a coffee roaster and

trader in Newark, N.J. "I'm buying contracts [for physical coffee deliveries] now because my gut

feeling is prices will go up."

     Futures had come under pressure during December, as rainfall in Brazil's coffee-growing areas

appeared to be helping the trees recover from 2014's severe drought. The dollar's rise to a near

10-year high against Brazil's currency added to the bearish sentiment in the market.

     The real's weakness encouraged producers and exporters to sell coffee abroad because they

receive more money back in their local currency.

     Not everyone thinks the situation in Brazil is dire. Last month, Volcafe Ltd., a unit of

commodities trade house ED&F Man Holdings Ltd., forecast that Brazil would reap 49.5 million bags of

coffee beans this season, 9.3% more than what the government crop agency says growers produced in

2014.

     But flagging rains in January mean production worries are now flooding back into the market, as

are investors.

     "It's showing relative strength in the commodity complex," said Matt Forester, chief investment

officer at CFG Asset Management, an investment adviser in Newtown Square, Pa. that manages about

$462 million. "Signals are saying buy coffee now."

     Mr. Forester bought shares in the iPath Pure Beta Coffee exchange-traded note, a security that

aims to track arabica prices, in October.

     In other markets, raw sugar for delivery in March ended down 0.6% at 14.78 cents a pound, while

cotton for March delivery settled at 60.43 cents a pound, up 0.4% on the day. March-delivery cocoa

ticked 0.3% higher to $2,912 a ton and orange juice for delivery in March ended 0.3% higher at

$1.4260 a pound.