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Brazil Coffee Output Falls In Worst Drought Since 1965

Posted by: : Paul EbelingPosted on: August 27, 2014 Brazil Coffee Output Falls In Worst Drought Since 1965

Brazil Coffee Output Falls In Worst Drought Since 1965


A long drought in Brazil has everybody praying for rain in Brazil’s coffee growing areas

Production in Brazil, the world’s #1  coffee grower, may drop as much as 18% to 40.1-M bags when the harvest ends next month, the National Coffee Council estimates, after a 3.1% fall last year. With damage worsening before the start of Spring in the Southern Hemisphere, the council said farmers may collect less than 40-M bags in Y 2015, creating the longest slump in 50 yrs.

Citigroup Inc. (NYSE:C) forecast on 21 August that a global production deficit may last into Y 2016 because of the shortfall in Brazil, which accounted for 36% of world supply last year. Futures that have gained more than any other commodity this year may rally 15% further by the end of December, to $2.25 lb, a  survey of 18 analysts showed. The surge is forcing buyers including J.M. Smucker Co.(NYSE:SJM) maker of Folgers, the best-selling US  brand, to raise retail prices.

Arabica coffee has rallied 77% this year to $1.9545 on ICE Futures US, the biggest gain among 22 raw materials in the Commodity Index, which fell 0.1%. The MSCI All-Country World Index of equities rose 5.7% over the same period. The Treasury Bond Index gained 4.1%.

Higher costs for unroasted beans will be less favorable for gross margins in Q-3,  the chief financial officer for coffee retailer Keurig Green Mountain Inc., (NASDAQ: GMCR) said in a conference call on 6 August. The company boosted retail prices this month, after similar increases this year by Starbucks Corp. (NASDAQ:SBUX) and J.M. Smucker.

Brazil is having its worst drought in decades,reservoirs in the southeast and central-west regions, home to most of the nation’s coffee plantations, are at less than 32% of capacity as of 24 August, compared with an August average over the previous 13 yrs of 59.3%, according to ONS, the grid operator for Brazil, which gets about 70% of its power from hydro-electric dams.

Coffee cherries are usually picked from April to September. As of 7 August, 86% of the crop had been collected, according to Porto Alegre, Brazil-based researcher Safras & Mercado. With harvest mostly done, trees need rain to spur blossoms that will produce next year’s crop. Most growing regions will get 35% less rain than normal in September, Sao Paulo-based weather forecaster Somar Meteorologia said.

The Key growing areas of Mogiana, Cerrado and South Minas Gerais got 17.7 ins of rain, or 50% of historical averages, from 1 January to 19 August, said Celso Oliveira, a meteorologist at Somar Meteorologia in Sao Paulo.

Compounding the damage to this year’s crop were unexpected downpours in July that led to premature flowering on harvested trees. When dry weather returned this month, the blossoms withered and fell, further eroding yield potential for Y 2015.

“Next year’s harvest appears as if it will be even lower than the current crop,” Tiago Ferreira, head of the coffee department at FCStone do Brasil in Sao Paulo, said in a report last month.

With the next harvest still 8 months away, there’s time for rain to limit yield losses or spur new blossoms on drought- stressed trees.

While reduced output in Brazil is eroding supplies, the world has had 4 straight yrs of production surpluses that sent arabica futures in November to a 7 yr low of $1.0095. The US Department of Agriculture (USDA) is forecasting a 5 th, with output exceeding demand by 961,000 bags in the 12 months that start on 1 October, down from 4.56-M a yr earlier. Each bag weighs 60 kilograms (132 lbs). Colombia, the 2nd largest producer of Arabica beans, will produce its biggest crop since Y 2008, the USDA said.

Brazil’s shrinking crop and rising consumption means a global production deficit of as much as 10 million bags in the year that starts on 1 October, the International Coffee Organization in London said on 1 August. Volcafe Ltd., a unit of commodities trader ED&F Man Holdings Ltd., estimated the deficit at 11.3-M bags. About 58% of world output is Arabica, a bean favored by Starbucks, while the rest is Robusta used in instant coffees and blends.

Inventories also are shrinking, with reserves at the end of Y 2013 totaling 40.1-M bags, down from 72.9-M a decade earlier, leaving supply “vulnerable,” the ICO said.

Much of the damage for next year’s crop may already be done in Brazil, the plants are in a state of stress.

 Stay tuned…


Paul Ebeling

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Paul Ebeling

Pattern Recognition Analyst, equities, commodities, forex
Paul Ebeling is best known for his work as writer and publisher of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly-regarded, weekly financial market letter, where he enjoys an international audience among opinion makers, business leaders, and respected organizations. Something of a pioneer in online stock market and commodities discussion and analysis, Ebeling has been online since 1994. He has studied and worked in the global financial and stock markets since 1984.

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