Cup of coffee?

As Coffee Soars, That Cup of Joe May Get Pricier

Dry Weather in Brazil Fuels Fears for Crop
Updated Feb. 18, 2014 4:10 p.m. ET
Caffeine junkies should brace for bad news: Their morning jolt could get more expensive soon.
Coffee prices on Tuesday staged their biggest gain in nearly a decade in the futures market, taking the rise for the year to 38%.
Prices of arabica coffee beans for delivery in March, the front-month contract, shot up 12.75 cents, or 9.1%, to a 13-month high of $1.5265 a
pound on the ICE Futures U.S. exchange. That was the biggest one-day percentage increase since November 2004.
Roasters and analysts said higher prices at the espresso bar and in the supermarket may not be far behind.
Traders are pushing prices higher amid concerns that supplies from the world’s biggest producer, Brazil, could shrink significantly. Hot, dry
weather in the country may have stunted the crucial early stages of the beans’ development. And hopes for a big rainfall over the weekend were
dashed, leaving trees still parched.
It can take months for fluctuations in the $9.3 billion coffee-futures market to trickle down to consumers. Many roasters buy beans months in
advance, allowing them to weather short-term increases in the futures market. But the magnitude of this year’s rally is so great that some
roasters and coffee shops will need to raise prices in the next few weeks, some analysts said.
Joseph Fernandes III, vice president at Socafe, a coffee roaster and trader in Newark, N.J., said if futures prices remain at current levels for the
next 15 to 30 days, he would “consider having to reflect that in my retail price.”
Coffee prices posted the biggest one-day gain in almost a decade Tuesday. Hot, dry weather in Brazil
has interfered with the development of coffee cherries, the fruit that surrounds the seeds that are
harvested and roasted as coffee beans. A worker places packages of coffee onto a pallet last week
before shipping them from a facility in Brazil. Bloomberg News

As Coffee Soars, That Cup of Joe May Get Pricier – 2/19/14, 1:26 AM Page 2 of 2

“Luckily, we bought most of our coffee when prices were lower, and we have reserves,” Mr. Fernandes said. “It’s just a matter of watching and
waiting at this point” to see if prices stay elevated.
The volatility in the futures market presents a challenge to roasters like Mr. Fernandes because it makes it difficult to predict what beans will cost
when it is time to make another purchase. Arabica beans are typically used in gourmet blends and prized for their mild flavor.
Coffee drinkers won’t see an immediate big increase in the cost of a cup. Higher prices are going to be seen in retail cans and bags of coffee first.
Beans make up a smaller share of the price in coffee shops.
“Supplies aren’t going to be totally depleted just yet,” and coffee companies are used to volatility in the price of their most-important ingredient,
said Dana LaMendola, beverage analyst at market-research firm Euromonitor International.

For investors, coffee’s rally presents a potentially lucrative, if risky, opportunity. Many are betting that prices will rise further, though it has been a
bumpy ride. This is the seventh session this year that arabica futures have moved at least 4% or more; six of those moves were gains. At this
point in 2013, there had been one such move.
The week ended Feb. 4 was the first time since July 2012 that money managers held more net bets that coffee prices would rise than fall,
according to the Commodity Futures Trading Commission.
Shawn Hackett, president of brokerage and consulting firm Hackett Financial Advisors in Boynton Beach, Fla., said he placed futures and options
bets on higher coffee prices throughout January. He predicts arabica prices will rise to $2 a pound in the next few weeks. Futures haven’t traded
above that level since March 2012.
The success of bets like Mr. Hackett’s likely depends on crop reports out of Brazil heading into the harvest season, which begins in May.
The dry spell has many traders and investors reducing their coffee forecasts as they worry about production losses in Brazil, the source of onethird
of the world’s coffee.
In November, many analysts had predicted Brazil’s crop would set a record for a third consecutive year. Now, some analysts and investors say
global production could fall short of demand this season.
However, rain in coming days and weeks could still reduce the overall damage to this year’s crop, analysts said. “I still feel like everyone’s just
running in, and when it finally falls, it will fall hard,” said Hector Galvan, senior market strategist at brokerage RJO Futures in Chicago. “It would
be hard for me to think we’re taking coffee to $2 over the next month without having concrete news” on what the damage has been in Brazil.
Growers are likely to begin evaluating how much damage has been done at the end of this month, when the coffee cherries are more developed.
The cherries could be smaller than usual, or they could fall from the trees prematurely due to the lack of moisture, analysts said.
The weather outlook for Brazil’s coffee regions calls for continued above-normal temperatures and limited rainfall for the next five days, according
to forecaster DTN.
“We have to expect to see a lot of volatility [in coffee prices] in the next week or so” until more is known about the crop damage, said Hernando
de la Roche, senior vice president at financial-services firm INTL FCStone in Miami.

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