March 25, 2014
Brazil Drought Rewards Coffee Hoarders Selling at Two-Year Highs
By Gerson Freitas Jr.
March 25 (Bloomberg) — Brazil’s worst drought in decades is coming with a silver lining for coffee growers responsible for one in every three cups of fresh java drunk in the world.
A price surge as the dry spell hurts crops is allowing farmers to sell stockpiled coffee at a profit for the first time in a year to pay debt and fertilizer bills. Sales at the highest price in two years will more than offset output losses and leave farms less pressed for cash when harvesting starts next month, according to growers and analysts.
“The price situation was stifling before,” Lucio Dias, commercial superintendent at Cooxupe, the world’s largest coffee-growers cooperative, said in an interview from Guaxupe, Brazil. “Now that prices improved, growers rushed to sell stocks to make some cash.”
Brazilian coffee trees suffered the driest and hottest start of the year in at least six decades, fueling a rally that sent New York futures to a two-year high on March 12. Roasters, who until December were buying the bare minimum on the prospect of ample supplies and lower prices, have been speeding up purchases because of uncertainty over the crop that growers will start harvesting in April or May, Gil Barabach, an analyst at crop researcher Safras & Mercado, said from Porto Alegre.
“Coffee stocks moved from the supply side to the demand side,” he said. “Farmers are now more capitalized and won’t be pressured to sell during the harvest.”
Cooxupe’s 12,000 producers have sold 2.2 million bags at rising prices since the beginning of the year, which represent about 44 percent of their usual annual sales and more than Costa Rica produces each year.
The stockpile sales will help support prices during the harvesting period because farmers won’t need to sell large volumes to pay debt, Dias said.
Coffee touched $2.0975 a pound on March 12, the highest since February 2012 and more than double a seven-year low of about $1 in early November. Futures pared part of the gain last week after producing areas in Brazil received some rain and closed at $1.764 a pound on ICE Futures in New York yesterday.
Futures probably will remain close to $2, a level that’s not high enough to encourage growers to boost output and still affordable for roasters, Roberio Silva, executive director of the London-based International Coffee Organization, said yesterday in an interview at a seminar in Sao Paulo.
“We expect supply and demand to remain balanced at current prices,” Silva said. “We see a healthy stockpile transfer from farmers to roasters.”
Last year, producers were offered to sell some of their output to the government at subsidized prices when the local market was paying less than the cost of about 300 reais ($129) per 60-kilogram (132-pound) bag. They were paid as much as 485 reais this month, according to data from the University of Sao Paulo’s Cepea agricultural research agency.
“Many roasters postponed coffee purchases because they were betting in even lower prices,” Eduardo Carvalhaes, a trader at Escritorio Carvalhaes, Brazil’s oldest coffee-trading firm, said by phone from the port city of Santos. “When the drought came, everyone rushed to do business.”
Jose Maria Pontes, a coffee farmer in Monte Santo, sold about 70 percent of the stockpiled production from his 145-hectare (360-acre) farm after prices climbed above 300 reais per bag by the end of January.
“Everybody had that level in mind,” Pontes said during a coffee break at a farmers meeting in Cooxupe’s headquarters. “Now, we’re looking at the 500-real level.”
Cicero Moreira da Silva, who had sold about 60 percent of last year’s crop at a loss for 250 reais a bag on average, was able to sell the remainder for as much as 360 reais after February’s rally.
“It was hasty of me,” said Silva by phone from Guaxupe. “If I had waited a little longer, I could have sold it for at least 450 reais.”
For the coming crop this year, Silva has locked in prices as high as 490 reais a bag on about 30 percent of production for delivery in September. The rising prices will more than offset an estimated 10 percent production loss because of the drought in his farm.
“The drought was a good deal because I won’t lose that much coffee,” he said. “We still don’t know for sure what the effects on future crops will be.”