Poor Brazilian harvest pressures coffee price

Coffee bean prices are on the move again. Top quality arabica last week surged to the highest level in two and a half year years on commodity markets as dry weather in Brazil raised concerns about next year’s crop.

Coffee prices have nearly doubled this year, with thin rainfall clipping output from the world’s biggest coffee grower and fueling worries about how already-weakened trees will fare next season.

Brazil is the source of one-third of the world’s coffee and about half of the world’s arabica beans, which are prized for their mild flavour and used in gourmet blends.

“Brazil is to the coffee market what Saudi Arabia is to the oil market,” says Harish Sundaresh, a commodities strategist at Loomis, Sayles & Company in Boston.

“If Brazil falls off a cliff, it would definitely get the market worried.” 

Arabica coffee for delivery in December is now at $US2.2080 a pound, the highest level since February 2012 on the ICE Futures US exchange.

Price increases may not quickly reduce demand, however. American consumers are unlikely to cut back on coffee consumption until prices rise by at least 30%, says Thom Blischok, a retail strategist at Strategy& (formerly Booz & Co). 

He says manufacturers and retailers are likely to change the size of coffee packaging to stave off further price increases. 

The recently ended coffee harvest was Brazil’s smallest in three years, after the main growing region experienced its worst drought in decades in the spring. 

In July, unseasonable rains caused some trees to flower early for the next year’s crop. But dry weather followed, causing some of those trees to drop their flowers and others to not flower at all. That will prevent development of the coffee cherries that contain the seeds that are roasted to make beans. 

“With no significant rainfall in September, an alarming situation with substantial losses for 2015 is projected,” Brazil’s National Coffee Council says. 

Next year is an off-year in Brazil’s two-year coffee cycle, meaning production would already have been lower without the unusual weather. 

Global coffee production could fall short of demand in the season that began October 1 by the largest amount since the crop year ended in 2006, the International Coffee Organisation said in July.