By Alexandra Wexler
The sharply rising price for coffee beans means that morning cup
of joe could soon get more expensive--again.
Arabica-coffee prices surged to the highest level in 2 1/2 years
Monday 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
flavor and used in gourmet blends.
Consumers were already hit with a wave of price increases this
summer by big roasters such as Starbucks Corp. and Folgers maker
J.M. Smucker Co. Now, traders and investors say the return of dry
weather in Brazil could keep prices high for years to come,
particularly if the perennial trees are damaged.
"Brazil is to the coffee market what Saudi Arabia is to the oil
market," said Harish Sundaresh, commodities strategist at Loomis,
Sayles & Co., a Boston investment adviser that manages about
$220 billion. "If Brazil falls off a cliff, it would definitely get
the market worried."
Mr. Sundaresh has placed bets in the futures market that benefit
from rising coffee prices and expects arabica prices to trade
between $2 and $3 a pound next year.
Arabica coffee for delivery in December ended Monday up 6.9% at
$2.2080 a pound, the highest level since February 2012 on the ICE
Futures U.S. exchange. The contract rallied as much as 9.2% during
the day.
In June, J.M. Smucker became the first major U.S. roaster in
nearly three years to lift coffee prices, announcing an average 9%
increase in the cost of popular supermarket brands such as Folgers
and Dunkin' Donuts. Kraft Foods Group Inc. and Starbucks followed
suit with their own price increases.
"If there isn't any rain, then certainly Starbucks and those
guys will be feeling some pain," said Jonathan Camarda, executive
wealth manager at Camarda Wealth Advisory Group. Mr. Camarda, who
manages about $210 million, is considering adding to shares he
first bought in August in the iPath Pure Beta Coffee
exchange-traded note. "You're looking at definite further upside"
for prices, he said.
Smucker and Kraft couldn't be immediately reached for comment.
Starbucks declined to discuss pricing plans or strategy for this
article, citing competitive reasons.
However, some traders say thin demand from roasters for the
beans at current prices could quell the rally. Many roasters put
off increasing their prices by running through stockpiles of
less-expensive beans.
"You still don't have significant demand out there," said
Rodrigo Costa, head of the coffee desk at brokerage Newedge in New
York. "It's too soon to really have an idea of the damage."
Starbucks said in a July earnings call that it had already fixed
prices for 60% of its coffee needs in 2015.
Will Slabaugh, a vice president at Stephens Inc. who covers
Starbucks, said at this point the company has locked in prices for
2015 and is beginning to do so for the following year as well. Mr.
Slabaugh said that "2016 is looking to present more and more of a
headwind."
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%, said Thom Blischok, chief retail
strategist at Strategy&, a consulting firm formerly known as
Booz & Co. He said manufacturers and retailers are likely to
change the size of coffee packaging to stave off further price
increases.
"Coffee is one of these American staples," Mr. Blischok said.
"Giving up their cup of coffee is going to be pretty tough to
do."
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, a growers' group, said last week.
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 Oct. 1 by the largest amount since
the crop year ended in 2006, the International Coffee Organization
said in July.
"Brazil is on target to potentially have two deficit years,"
said Brian Kurtzer, senior portfolio manager at Durham, N.C.-based
Verity Asset Management, which manages about $410 million. "The
path of least resistance is still on the upside."
Arabica coffee is the only commodity that Mr. Kurtzer is betting
on to increase in price, he said. He bought shares in the iPath Dow
Jones-UBS Coffee Subindex Total Return exchange-traded note, an
investment product that tracks coffee prices, in August and added
to the position last month.
Leslie Josephs contributed to this article.
Write to Alexandra Wexler at alexandra.wexler@wsj.com
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