Brazil Shipping Coffee to ICE Signals Fund-Driven Rally May Fade

  • ICE approved first Brazilian beans in more than a year Monday
  • Gradings of Brazilian coffee could be bearish, Rabobank says

Coffee bulls, beware. Brazil could soon spoil the party.

The world’s largest producer has shipped its first beans that can be delivered on ICE Futures U.S. in more than a year, a sign stockpiles backed by the bourse in New York could soon rebound from a four-year low. That may put an end to a fund-driven rally that sent arabica futures up 16 percent this year.

Brazil is sending coffee for delivery on the exchange as production is forecast to rise 13 percent this season, according to an estimate from the U.S. Department of Agriculture. Output will be mainly driven by the arabica variety, the kind favored for specialty drinks such as those made by Starbucks Corp.

“As we were expecting for some time, we see the first lot of Brazil coffee certified at the exchange," Carlos Mera, a London-based analyst at Rabobank International, said by e-mail Tuesday. "If you start to see tens of thousands of bags, which potentially will amount to hundreds of thousands of bags, that would be very bearish."

Grading Beans

Arabica-coffee futures rallied this year as low exchange inventories attracted inflows from funds. Speculators boosted bets on rising prices to their highest since 2014 in the week ended July 5, U.S. government data compiled by Bloomberg showed. Stockpiles that have been declining since 2013 are currently at 1.3 million bags, the lowest since October 2011, ICE data showed. A bag of coffee weighs 60 kilograms, or 132 pounds.

ICE graded 285 bags of Brazilian coffee that were added to the exchange’s stockpiles Monday. The beans, currently stored in New York, are the first from the South American nation to join the bourse’s inventories since April 29, 2015. The last time the exchange had Brazilian coffee in its reserves was Jan. 20.

The South American nation’s beans started being accepted for delivery on ICE in March 2013 and the first coffee was graded three months later. The bourse had failed to attract large supplies from Brazil because it applied a discount of 9 cents a pound until May, when that changed to 6 cents. The country also doesn’t produce large amounts of the type required by ICE, which needs to be free from all unwashed flavors.

A smaller discount now applied to Brazilian beans has made it easier for traders to reach the price levels at which it’s profitable to deliver on the exchange. While that’s still not the case at the moment, that tipping point got closer when prices rallied as much as 4.1 percent Monday to the highest in more than a year, Mera said. Futures for September delivery rose 0.3 percent Wednesday after falling 1.3 percent yesterday.

Rain that fell over Brazilian growing areas at the beginning of the harvest has hurt the crop’s quality and reduced the amount of beans that meet the exchange’s requirement, said Lucio Dias, a commercial manager at Cooxupe, Brazil’s largest coffee cooperative. Traders had initially planned to put 600,000 and 1 million bags of Brazilian coffee up for grading, he said, adding that he no longer believed any of Cooxupe’s output would end up being delivered.

Brazil may still have at least 4 million bags of the semi-washed arabica type that can potentially be sent to the exchange, Mera said. While not all of them will be graded for delivery, even 10 percent would mean a “significant” increase in the bourse’s stockpiles, he said.

Before it's here, it's on the Bloomberg Terminal.