The market for arabica-coffee futures feels overcaffeinated.
Prices are swinging the most in more than a decade as rains ease the Brazilian drought that sent prices to a two-year high this month. After the worst dry spell in decades hampered crops in January and February, precipitation brought relief to plants this month. There’s still “concern” that production will suffer in about 25 percent of growing areas, according to Commodity Weather Group.
Brazil growers produce one in every three cups of coffee drunk in the world. Estimates for the country’s output this year range from as high as 56.5 million bags to as low as 46 million. The gap is almost the size of the expected production in Colombia, the second-biggest supplier of arabica beans, which are favored by Starbucks Corp.
“There are still many uncertainties about the size of the harvest,” said Rodrigo Costa, the director of the coffee desk for Newedge USA in New York, who has been trading the commodity for more than two decades. “This is unprecedented. It’s impossible to predict with accuracy prices in this type of weather market. This is causing the extreme volatility.”
Coffee’s 60-day historical volatility reached 55.23 today, after touching 55.93 yesterday, the highest since October 2000.
Arabica coffee for May delivery slid 0.6 percent to settle at $1.753 a pound at 1:37 p.m. on ICE Futures U.S. Prices jumped 58 percent this year, the most among the 24 raw materials tracked by the Standard & Poor’s GSCI Spot Index.
Futures surged as much as 89 percent in 2014 to $2.0975 on March 12, and have since slumped 16 percent. This year’s unexpected drought comes after prices in 2013 capped the longest stretch of annual declines in two decades as the U.S. government forecast global supplies would be in surplus for fourth season. A bag weighs 60 kilograms, or 132 pounds.
Coffee is up almost 30 percent from a year earlier, signaling increasing bean costs for Keurig Green Mountain Inc. and J.M. Smucker Co., maker of Folgers, the best-selling U.S. brand.
Prices will average $1.50 to $2.25 “over the next several quarters” Citigroup Inc. analysts including Aakash Doshi said in a report today, citing drought damage in Brazil. A crop disease called leaf rust has also hampered crops in Central America and Mexico the past two years.
“People are not sure if the trees in Brazil will show a recovery next year,” Newedge’s Costa said in a telephone interview. “The rally has left many producers in a good cash position to take care of their plantings. If they start applying more fertilizer, production can come back.”