Brazil drought sends coffee prices to highest point in two years

ENJOY that morning coffee, because they are set to get MUCH more expensive due to lack of rain on the other side of the world. Here’s what’s happening.

Coffee prices have reached a two-year-high after a drought in Brazil.

THE morning caffeine hit is about to get more pricey as drought in top producer Brazil has sparked fears of a global shortfall of coffee this year, sending the price of beans soaring.

Coffee prices hit their highest point in two years in New York, with Arabica beans due for delivery in May fetching 203.75 cents per pound, more than double that of the 100.95 cents per pound in November.

The worst drought to hit Brazil in decades has sparked fears that the crop in the world's top coffee producer could shrink for the second consecutive year for the first time since 1970.

Leandro Gomes Ribeiro Costa, head of coffee at farmer group Coopamig, said some regions of Brazil have had only a tenth of their average rainfall so far this year during a crucial stage in the beans' development.

Coopamig, which is made up of 5,800 farmers from the country's main coffee producing region Minas Gerais, expects to harvest up to 30 per cent less coffee this year than in 2013.

“I've never seen such a drought in my life: in some places we have found coffee wilted on the tree,” he told AFP.

Coffee prices have reached a two-year-high after a drought in Brazil.

The price of robusta, the more bitter variety of bean used in instant coffee, has also surged due to cold and drought in Vietnam. On Friday, London prices hit $2,176 a tonne, up from $2,076 at the same time last week.

The International Coffee Organization (ICO) now forecasts a global production deficit of at least 2 million 60 kilogram bags of coffee in 2014-15.

F.O. Licht analyst Stefan Uhlenbrock said the market has staged a complete turnaround since November, when “everybody was talking of supply overhang, with Brazil coming off a record off-year crop, Columbia seeing a very strong recovery in its production and Vietnam also heading for a bumper crop”.

“Now everybody is concerned about the supply outlook for Brazil, with a real threat of a deficit in the coffee market, which has not been the case in the past four years,” he told the ICO recently.

The beginning of the year is a crucial period for the development of Brazil's coffee beans, and the market is easily spooked by fears of a poor crop.

Agronomist Marcelo Almeida said the lack of water in parts of Brazil has stunted the beans' development. This year it will likely take 600-700 litres of coffee cherries to produce a bag of 60 kilogrammes, after washing and drying, compared to 500 litres in a normal year.

“It is fairly unprecedented this kind of drought at this particular period of time in terms of cherry growth,” said Kona Haque, who leads Macquarie's agricultural commodities research.

F.O. Licht has already reduced its forecast for Brazil's crop this year by 15 per cent to 48 million bags.

Colombia has also produced smaller crops in recent years.

“The real damage will only be seen when the harvest starts in May,” Uhlenbrock said.

“If the weather stays dry and you don't get rain until May, as some weather forecast suggest, this market could go ballistic,” said Haque. “Equally, if the crop ends up being close to 55 (millions bags) the market could start collapsing.” Arabica prices soared to a 14-year high of 307.20 cents a pound in 2010-2011 due to fears of a global shortfall. But a rebound in production the following year saw prices collapse in 2012 and 2013.

Farmers are already worrying about the impact of the drought on next year's crop.

Ribeiro Costa said his coffee growers have only been able to apply a third of the amount of fertiliser they normally would this year, which could cut output in 2015.

And the impact is set to begin filtering down to the consumers. Griffiths Coffee, Australia's oldest coffee roaster which supplies to the retail sector, is already forecasting a rise in consumer prices.

“The recent increase in prices of coffee beans will see an increase of at least 50 cents in a cup of coffee. A cup of coffee here in Australia costs somewhere between 3 to 4 dollars, so it'll probably go up by about 12 per cent to 15 per cent,” Chris Togias, director of Griffiths Coffee, told AFP.

He added that “the international brokers are finding it quite difficult to supply globally because a lot of the farmers are actually not honouring their contracts.” “A lot of the farmers say they will not honour the contract at US$1.30 a pound because they can now get US$2.06 a pound. There is some talk in the industry of that happening,” he said.

But some analysts are more optimistic about Brazil's ability to bounce back. “At some point, it will rain again in Brazil,” said Judith Ganes-Chase, president of J. Ganes Consulting.

“Brazil is going to be back having bigger crops, this market will return back to surplus and we'll be right back to where we were before this new development.”