Arabica coffee (NYBOT:KCK14), this year’s best performing commodity, may climb to the highest in almost three years as dry weather during the next two months threatens to cut production in top grower Brazil, J. Ganes Consulting said.
Futures traded on ICE Futures U.S. may rise to $3 a pound by May from $1.90 now, Judy Ganes-Chase said today in an interview at a seminar at the International Coffee Organization in London. Prices surged this year as dry weather is set to cut Brazil’s output to 48 million bags from a previous forecast of 56 million bags, estimates F.O. Licht GmbH.
“The market is going to react to the situation now,” said Ganes-Chase, president of the Panama City-based researcher. “The market needs to rally now to jump-start and promote production in other areas and shift the supply chain.”
Arabica coffee rallied 72% this year, making it the best-performing commodity in the Standard & Poor’s GSCI gauge of 24 raw materials. The price was last above $3 in May 2011. A smaller crop in Brazil may tip the global market into the first shortage in five years next season, Stefan Uhlenbrock, an analyst at F.O. Licht, said at the seminar today. The surplus was estimated at 7.2 million bags in 2013-14.
Brazilian producers are taking advantage of the current rally to sell and the potential for growers to have sold too much may also help prices rise later, Ganes-Chase said. Sales from this year’s crop are currently a record 15 million bags, according to Cooxupe, Brazil’s biggest coffee-growing cooperative. That compares with 3 million bags a year earlier.
“How much of the crop was sold already and is it going to be there, or are you going to run into a situation where there are going to be defaults?” Ganes-Chase said. “You’re going to have a smaller crop and there will be less selling going into it and now there’s the potential for it being oversold and producers having to lift hedges, so that’s another a reason why the market needs to go higher.”
Dry weather in Brazil will probably result in a bigger loss in quality than in quantity this year, Ganes-Chase said. The impact will be bigger next year as trees don’t have enough energy to grow more productive tissue, where the new flowers will blossom and the cherries containing the beans will grow. While the global coffee deficit will be small, traders are reacting as forecasts shifted from surplus expectations.
“What matters is what the market had been anticipating and what it will actually be,” she said. The market was expecting a big surplus and now it will probably be “a little short,” she said.