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Coffee surges to 7-year highs with more cold headed for Brazil

The last time coffee hit that level was in 2011.
Image: Bloomberg

Arabica coffee futures are hitting fresh highs and extending a dramatic rally with more crop-destroying cold temperatures heading to Brazil, the world’s top grower.

Prices for the high-end beans favoured by Starbucks Corp. and other cafe chains have surged more than 30% in a week, and will eventually top $3 a pound, according to Judy Ganes, a consultant with decades of experience in the industry. The last time coffee hit that level was in 2011.

The surge means coffee could get even more expensive for consumers, just as worries about global food inflation kick in amid higher shipping costs and supply chain disruptions with economies reopening.

Those sky-high prices are because coffee trees in Brazil were weakened by a drought, then pummeled by two frosts in less than a month. Now, more low temperatures are forecast for important growing regions from Wednesday into the weekend, according to Maxar Technologies Inc. Brazil accounts for 40% of world output.

Four days of frost threat is spooking the market, and if it hits, it will be “unprecedented,” said Nick Gentile of NickJen Capital Management. “We’ve never had two frosts, drought and now another frost. There’s no data to compare.”

Futures for September delivery rallied as much as 14% to $2.152 a pound in New York, the highest since October 2014. They settled up 10% at $2.078.

Projections for losses so far are substantial. The frost on July 20 probably erased 3.45 million bags of output in just the south of Minas Gerais, the nation’s main coffee-growing region, according to Mercon report seen by Bloomberg. In 2020, Brazil’s total production was 49 million bags. A bag weighs 60 kilograms, or 132 pounds.

The freezing temperatures last week especially hurt young trees, which will need to be trimmed or replanted, affecting output for years.

The lost bags are unlikely to be offset, with other important growers reaping less than expected. Indonesia’s arabica output may shrink by 20%, according to an industry group estimate, because low prices in recent years have discouraged farmers from expanding estates. Rising freight costs and container shortages are hobbling exports. With La Nina weather patterns likely to return this year, too much rain could threaten Vietnamese coffee fields.

Margin calls

Prices are also being supported by a move from the ICE exchange to almost double initial margin requirements for arabica futures, encouraging traders to cover short bets, Alex Boughton, a broker at Sucden, said in a note.

There are arguments in favour of a cooldown in coffee. Price hikes for the world’s favourite don’t last long, according to Bloomberg Intelligence, which analysed historical prices and said wholesale coffee is essentially the same price as it was in 1976.

“Coffee is a prime example of the lack of enduring inflationary forces from commodities,” said Mike McGlone, a commodities strategist at Bloomberg Intelligence. “Rapidly advancing technology is creating more supply than demand, notably at a much greater velocity than population growth.”

© 2021 Bloomberg

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