By Alexandra Wexler NEW YORK
Coffee prices posted the biggest one-day gain in almost a decadeTuesday after weekend rains in Brazil did little to ease dry conditions ingrowing areas, fueling concerns about supplies from the world’s largestproducer. Arabica coffee for delivery in March rose 9.1% to $1.5265 a pound on the ICEFutures U.S. exchange, while the more actively traded contract for May deliveryclosed up 8.8% at $1.5485 a pound. Both contracts had the largest percentagegain since November 2004 and the highest settlement since Jan. 18, 2013. Hot, dry weather in Brazil has been interfering with the development ofcoffee cherries, the fruit that surrounds the seeds that are harvested androasted as coffee beans. Growers and traders had hoped rainfall over theweekend would increase moisture levels for the coffee trees, but it wasminimal. “Ten percent of the crop is certainly beyond repair” at this point, saidShawn Hackett, president of brokerage and consulting firm Hackett FinancialAdvisors in Boynton Beach, Fla. Arabica futures will likely rise to $2 a pound in the next few weeks, saidMr. Hackett, who placed futures and options bets on rising coffee pricesthroughout January. Coffee prices last traded above $2 in March 2012 and are up40% this year. The dry spell has many traders and investors reducing their coffee forecastsas they worry about production losses in Brazil, the source of one-third of theworld’s coffee. In November, many analysts had forecast the Brazilian cropwould be a record for the third consecutive year. But now some analysts andinvestors are saying global production could fall short of demand this season. “We’re definitely going to be in a deficit” because of the reduced productionin Brazil, Mr. Hackett said. January and February have been the driest months in Brazil in 30 years,according to Somar Meteorologia, a Sao Paulo-based private weather service.Coffee trees need at least 20 inches of rain over the first three months of theyear to develop normally, but the regions have received between four and sixinches so far, Somar said. “We may well be on our way to potentially catastrophic losses,” said SterlingSmith, a futures specialist at Citigroup in Chicago. About 1 1/4 inches of rain or less have fallen on the coffee-growing areasover the last four days, according to weather forecaster DTN, and the outlookfor the next five days is for continued above-normal temperatures and limitedrainfall. “We have to expect to see a lot of volatility (in coffee prices) in the nextweek or so” until more is known about the crop damage, said Hernando de la Roche, senior vice president at INTL FCStone in Miami. This is the seventh session this year that arabica futures have had a 4% or
larger move, with six of them as gains. At this point in 2013, there had been one such move.
However, with the rapid rise in prices, a pullback in the market could be imminent, some traders 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 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.