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Brazilian Exports Cool Coffee’s Rally

Specialty green coffee in burlap sacks stacked at a warehouse in Goroka, Papua New Guinea

Prices Are Down 14% From April’s Peak, but Tighter Supplies Could Mean More Price Spikes Later

Wall Street Journal | May 14, 2014

By Leslie Josephs

Surging coffee prices have spurred Brazilian growers and dealers to export more beans. The increase in shipments has helped bring prices down 14% from a more than 26-month high hit last month. But the exports have reduced stockpiles, setting the stage for tight supplies and another round of price spikes later this year, traders and investors say.

Coffee prices have surged 66% this year as a severe drought ravaged Brazil’s main region for growing arabica beans, which are prized for their mild flavor. Coffee for May delivery ended Tuesday at $1.8365 a pound on the ICE Futures U.S. exchange.

Some small roasters already have raised wholesale prices, while large coffee sellers, including Mondelez International Inc., MDLZ -0.66% say they may eventually do the same for retail customers.

Andrea Illy, chief executive of Italian roaster illycaffè SpA, said in an interview the company is “trying to absorb this extra [price] shock” and hasn’t ruled out raising prices. Arabica prices “over $2 a pound will be a concern,” he said.

Many Brazilian growers and dealers used the rally to unload beans they had stuffed in warehouses last year, when coffee prices were scraping 6½-year lows. Brazil’s exports of unroasted coffee rose 15% this year through April, compared with the same stretch in 2013. The exports, the most in at least five years for the period, came almost entirely from stockpiles, since growers started picking arabica coffee beans only in April. Brazil is the world’s largest coffee producer.

Brazil will have trouble keeping up the rapid pace of exports once farmers deplete their stockpiles, analysts say. Farmers and traders will likely have run through much of their spare supplies in a matter of months, while the drought is expected to hurt coffee production for years to come. A drop in the quality and quantity of Brazil’s crop could drive prices to $3 a pound this year, said Judy Ganes, president of J Ganes Consulting LLC.

“The quality of the crop is going to be terrible,” she said. “There isn’t enough coffee around to make up for that.”

The hot and dry weather hit coffee fields just as cherries that contain arabica beans were maturing, stunting their development. The drought also comes as Brazilian growers are nurturing a large number of young trees, which are more vulnerable.

Paula Paiva, a fifth-generation coffee grower, said young trees comprise about 17% of the 370 acres of coffee trees on her family’s farm, Fazenda Recanto, in Minas Gerais, Brazil’s biggest arabica-growing state. She said production will likely fall 20% to 30% this year from an average of 5,000 bags, as the drought hurt the development of the seeds that grow inside coffee cherries. Ms. Paiva said she had 70 bags of beans in storage, from 3,000 at the start of the year.

“The crop doesn’t look damaged, but if we open [the cherries], we can find many cherries are empty,” she said.

The International Coffee Organization said the market could tip into a deficit in the 2014-15 crop year, meaning not enough beans will be produced to meet demand.

Investors in the $11.2 billion coffee futures market are bracing for a dent in Brazil’s production this year and next.

Mike Seery, president of Seery Futures, a brokerage firm in Plainfield, Ill., said he would buy futures if prices fall more. He sees prices dropping in the short term as traders take profits and await crop reports from Brazil. Mr. Seery sees prices rising to $3 a pound by year-end, as the long-term impact of the drought becomes clear. “Coffee’s grown on trees, so this drought will have an effect for a couple of years,” Mr. Seery said.

To be sure, the full extent of damage to Brazil’s coffee crop isn’t yet known. Output from No. 2 arabica grower Colombia, which has had better weather, is soaring.

Some analysts argue traders already have taken a smaller Brazilian crop into account.

“I think at this point most of the bad news in terms of the Brazilian crop has been priced in,” said Christopher Narayanan, director of agricultural commodities research at Société Générale SA.

Still, Brazil’s farmers aren’t offering much hope for relief.

“Next year could be worse,” said Ms. Paiva, the coffee grower.

—Alexandra Wexler contributed to this article

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