Coffee Prices Likely to Rise - No Rain in Brazil

Posted by Dave and Dennis on November 29th, 2006 at 08:54am

Brazilian coffee grower Joaquim Jose de Oliveira won’t be bringing his full harvest to market this year. Drought that has weakened next season’s crop is forcing him to husband this season’s.

“I’m only selling enough to keep going,” says Oliveira, 50, who wears a straw hat, mud-smeared clothes and white, rubber boots as he prunes one of his trees near the town of Guaxupe. “Otherwise, next year I’ll have almost nothing to sell.”

October rains came too late for trees in Brazil’s prime coffee-growing region to recover from the driest winter in two decades. Few of the plants have flowered properly, meaning next season’s harvest will be meager.

Forecasters say output in the world’s largest coffee- producing nation will fall to a four-year low. That has pushed up futures prices by 10 percent in the past month to $1.2265 a pound on the New York Board of Trade. Prices may rise to as much as $1.35 a pound in coming months as farmers like Oliveira hold back supplies, says coffee trader John Wolthers.

“Producers are disciplined these days,” says Wolthers, who works at Santos-based coffee exporter Comexim, which buys high-quality Arabica beans. “They’ve learned to manage the pace of sales pretty well.”

Wolthers, 51, buys most of his coffee from the southeastern state of Minas Gerais, where communities such as Guaxupe produce some of the country’s finest beans.

Oliveira says that because of the drought, only 1,200 of the 23,000 trees on a plantation he farms with his three brothers flowered properly.

“Without proper flowering, there’s little room for optimism over the crop to be harvested in 2007,” Nelson Batista Martin, head of research at the Sao Paulo-based Institute for Agricultural Economics, said in a Nov. 16 report.

Two-Year Cycle

The institute forecasts Brazil’s next April-to-October harvest may shrink to a four-year low of 30 million bags, each containing 60 kilos (132 pounds), from 41.6 million bags this year.

Brazil’s coffee production normally has a two-year cycle that consists of a larger crop, such as the one just harvested, followed by one of about 20 percent less. A decline to 30 million bags would represent a 28 percent drop in the harvest.

Mild-tasting Arabica beans account for about 70 percent of Brazil’s output. The rest comes from Robusta beans, which are more bitter and used to blend with Arabicas or to produce soluble, or instant, coffee.

Fruit Buds

About half the Arabica trees in Brazil failed to flower properly because of the dry spell, says Margarete Boteon, head of coffee research at the University of Sao Paulo, who is based in Piracicaba in southeastern Sao Paulo state.

The extent of flowering determines the potential of the ensuing harvest. After pollination, the trees start to develop fruit buds, which finally turn into bright-red cherries that contain two beans.

Guaxupe, which has the world’s biggest coffee cooperative, is nestled amidst the hills that border the states of Sao Paulo and Minas Gerais, which produce 80 percent of Brazil’s Arabica beans.

The 10,000 members of the Guaxupe Regional Coffee Cooperative, known as Cooxupe, produced about 4.2 million bags this year, equivalent to 13 percent of Brazil’s overall Arabica output. Next year, Cooxupe’s production will fall 40 percent to about 2.5 million bags, says Joaquim de Andrade, the cooperative’s chief agronomist.

Little Rain

From May to September, Guaxupe received only 80.6 millimeters (3.2 inches) of rain, compared with 250 millimeters a year earlier, according to Cooxupe’s Web site. The rainfall was the lowest since 1985.

Given the forecast drop in production, Cooxupe is advising farmers to sell the minimum from this year’s harvest, says Mario Ferraz de Araujo, another of the cooperative’s agronomists.

“We try to show them how to manage the sales to avoid financial difficulties later,” says Araujo, 43. “The farmers have become more aware of the advantage of selling at the right time.”

Global warming may lead to recurrent droughts, reducing world supplies of Arabica, says Jose Francisco Pereira, general director at Fazenda Monte Alegre, Brazil’s third-largest coffee farm. That would lead roasters to increase Robusta coffee, which is more resistant to heat and drought, in their blends, Pereira says. The biggest producer of Robusta coffee is Vietnam, followed by Brazil and Indonesia.

Seeking Confirmation

Pereira, 52, forecasts production at Monte Alegre will fall 38 percent to 58,900 bags next year.

Mario Cerutti, director of purchasing at Lavazza SpA, Italy’s biggest coffee roaster, says there is still time for late berries to emerge next season. Turin-based Lavazza may send analysts to Brazil to assess the crop. Without confirmation of a sharp drop in output, New York coffee futures will hover between 95 cents and $1.20 per pound in coming months, Cerutti says.

Efforts by coffee farmer Mario Ribeiro do Valle to minimize the effects of the drought on his 200-hectare (494-acre) plantation near Guaxupe were of little avail. Valle, who spent $185,000 on fertilizers and pesticides alone, reckons his next harvest will yield two-thirds less than the last.

“I treated my coffee trees better than anyone I know,” says Valle, a descendant of the Baron of Guaxupe, who introduced coffee to the region in the 19th century. “It didn’t help much.”

By Carlos Caminada

http://quote.bloomberg.com/apps/news?pid=20601109&sid=aZy36WGXOte0

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