Coffee Enters Bear Market as Brazil Sees Lower Crop Loss

Coffee futures entered a bear market after rains eased drought damage for plants in Brazil, the world’s top producer and exporter.

Growers are facing less severe crop losses than estimated after showers last month reduced the impact of the worst dry spell in 50 years, Brazil’s Agriculture Minister Neri Geller said yesterday. Next year, farmers may collect a “bumper” harvest, he said.

Futures have tumbled 22 percent from a two-year high in April, partly as rising American stockpiles helped cushion the impact of production declines after Brazil’s drought. Output this year may be 50.5 million bags, according to Mercon Group. That’s higher than the 49.5 million estimated by the U.S. government in May.

Bigger production forecasts “suggest that the damage was not as significant as expected,” Boyd Cruel, a senior analyst at Vision Financial Markets in Chicago, said in a telephone interview. “We are also in the middle of the harvest, and conditions remain ideal, with no disruptions.”

Arabica coffee for July delivery fell 0.7 percent to close at $1.7115 a pound at 1:43 p.m. on ICE Futures U.S. in New York. That marked a 20 percent drop from this year’s settlement high of $2.148 on April 24, meeting the common definition of a bear market.

‘Pleasantly Surprised’

Mercon said in a report to clients that it was “pleasantly surprised” that crops in areas worst hit by the dry weather are recovering. Brazil’s crop forecasting agency Conab last month said it expected this year’s output to be 44.6 million bags, each weighing 60 kilograms (132 pounds). The forecast may be revised higher by the end of the harvest, Minister Geller said, declining to give specific figures.

Prices have surged 55 percent this year as Brazil’s drought made coffee 2014’s best-performing commodity. An unprecedented three months with almost no moisture prompted Volcafe Ltd. to forecast the biggest global supply shortage in more than a decade. Demand will exceed output by 11.3 million bags, according to the Winterthur, Switzerland-based unit of commodities trader ED&F Man Holdings Ltd.

Ipanema Coffees, a supplier of beans to Starbucks Corp., expects yields for its crop to drop by as much as 40 percent.

“It’s a mistake to suppose that coming rains will solve the problems we’ve had,” Washington Rodrigues, the president and chief executive officer of Alfenas, Minas Gerais-based Ipanema, said last week. “Once vegetative growth is lost, you don’t recover it.”

J.M. Smucker Co., the maker of Folgers, the best-selling U.S. brand, said today that it increased coffee prices by an average of 9 percent after bean costs rose.

Hedge-Fund Bets

Hedge funds are paring expectations that this year’s rally will continue. Money mangers cut their coffee net-long position by 3.4 percent to 39,482 contracts as of May 27, the second decline in three weeks. Prices slumped 14 percent last month, the most since 2011.

Stockpiles of unroasted beans in the U.S., the world’s biggest consumer and importer, rose 7.6 percent in April from a year earlier, the New York-based Green Coffee Association said May 15.

“We won’t know the exact size of Brazilian losses until at least July,” and that may keep volatility high as the nation heads into the winter season, when frost can damage plantings, said Cruel of Vision Financial Markets.

To contact the reporters on this story: Marvin G. Perez in New York at mperez71@bloomberg.net; Luzi Ann Javier in New York at ljavier@bloomberg.net

To contact the editors responsible for this story: Millie Munshi at mmunshi@bloomberg.net Patrick McKiernan, Joe Richter

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