By Alexandra Wexler
Investors are going back for a second cup of coffee.
Arabica-coffee prices have risen 8.7% this week and 5.1% this
year in the futures market, as dwindling rains in Brazil, the
world's largest grower, spur traders to once again bet on higher
prices. Only silver has performed better this year among the 22
commodities tracked in the Bloomberg Commodity Index.
Coffee was the top-performing commodity in 2014 and one of just
a few to post a gain amid steep drops in prices for crude oil,
natural gas, copper and soybeans. Arabica prices jumped 50% last
year after Brazil experienced its worst drought in decades. Futures
soared above $2 a pound, forcing big roasters such as Starbucks
Corp. to raise prices. Arabica is prized for its mild flavor and
used in gourmet blends.
The market has pulled back from those highs. But investors are
betting that if the rains in Brazil's coffee-growing areas
disappoint again, the market could surge back above $2 a pound in a
hurry.
On Wednesday, arabica for delivery in March ended up 0.1% at
$1.7505 a pound on ICE Futures U.S.
"We just receive reports about the scarcity of water across the
country every day," said Harish Sundaresh, commodities strategist
at Loomis, Sayles & Co., a Boston investment adviser that
manages about $223 billion. Mr. Sundaresh bought coffee futures at
the end of last year, when they fell back below $2 a pound.
"I think it seems like 2015 is building up to be a year where
coffee prices go 40% to 50% to the upside [again]," he said, adding
that futures could easily crack $3 a pound, a level last seen in
May 2011.
The 2014 coffee harvest in Brazil, which produces a third of the
world's supply, was the smallest in three years. This year is an
off-year in Brazil's two-year coffee cycle, meaning production
would already have been lower without the unusual weather.
Colombia, the world's No. 2 arabica grower, has been ramping up
production, helping to alleviate some of the concerns about global
supplies. But Colombia only produces about a quarter as much coffee
as Brazil.
"For this month, we expect rain within the average--the problem
will be the distribution," said Marco Antonio dos Santos,
agro-meteorologist at Somar Meteorologia, a closely watched São
Paulo-based weather forecaster. "If we only get it as localized
downpours, then some areas, or even some farms, could get less rain
than they need. We'd need good rain above the average to be
ideal."
The lower production and higher coffee prices are hitting coffee
companies as well as consumers.
J.M. Smucker Co. cut its outlook for the year in November after
its Folgers coffee brand suffered a decline in sales after it
raised prices. Smucker and Maxwell House maker Kraft Foods Group
Inc. didn't return requests for comment. Starbucks declined to
comment.
"I'm kind of a little nervous about what we're going to see come
May and June," when Brazil's coffee harvest ramps up, said Joseph
Fernandes III, vice president at Socafe, a coffee roaster and
trader in Newark, N.J. "I'm buying contracts [for physical coffee
deliveries] now because my gut feeling is prices will go up."
Futures had come under pressure during December, as rainfall in
Brazil's coffee-growing areas appeared to be helping the trees
recover from 2014's severe drought. The dollar's rise to a near
10-year high against Brazil's currency added to the bearish
sentiment in the market.
The real's weakness encouraged producers and exporters to sell
coffee abroad because they receive more money back in their local
currency.
Not everyone thinks the situation in Brazil is dire. Last month,
Volcafe Ltd., a unit of commodities trade house ED&F Man
Holdings Ltd., forecast that Brazil would reap 49.5 million bags of
coffee beans this season, 9.3% more than what the government crop
agency says growers produced in 2014.
But flagging rains in January mean production worries are now
flooding back into the market, as are investors.
"It's showing relative strength in the commodity complex," said
Matt Forester, chief investment officer at CFG Asset Management, an
investment adviser in Newtown Square, Pa. that manages about $462
million. "Signals are saying buy coffee now."
Mr. Forester bought shares in the iPath Pure Beta Coffee
exchange-traded note, a security that aims to track arabica prices,
in October.
In other markets, raw sugar for delivery in March ended down
0.6% at 14.78 cents a pound, while cotton for March delivery
settled at 60.43 cents a pound, up 0.4% on the day. March-delivery
cocoa ticked 0.3% higher to $2,912 a ton and orange juice for
delivery in March ended 0.3% higher at $1.4260 a pound.
Write to Alexandra Wexler at alexandra.wexler@wsj.com
Access Investor Kit for Starbucks Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US8552441094
Subscribe to WSJ: http://online.wsj.com?mod=djnwires