Soft commodities see a strong quarter as weather and lower supplies fuel higher prices.
Coffee prices as measured by the ICE futures contract (KC) finished the first quarter of 2014 at $1.78 a pound, up 65 cents, or 58 percent. Prices made a low for the quarter on Jan. 2 at $1.13 a pound and then quickly rallied up to $2.09 a pound by March 12 before retracing to current levels.
The coffee market exploded in late January based on dryer and hotter-than-normal conditions in Brazil's coffee-growing areas. Brazil is the largest producer of coffee in the world, producing roughly one-third of total world production.
The heart of Brazil's coffee-growing region is the southern part of the state of Minas Gerais. From January through March, southern Minas Gerais received only a fraction of normal rainfall, well below anything recorded during the last several decades. Lack of rain, combined with unusually hot weather, began to impact cherry formation and stress the coffee trees.
The actual amount of damage done to this year’s crop won't be known until after the harvest begins in May. Traders are guessing, based on current conditions, the current crop has been reduced by 5 million to 10 million 60 kg bags. There is also concern that continued stress could affect the health of trees and impact next year’s 2015 crop as well.
Before the drought, the USDA in its last report of 2013 projected total world production of coffee for the 2013/14 year ending Sept. 30 at 150.4 million 60 kg bags. Brazil was expected to produce 53.1 million bags. Total world year-end coffee stocks were expected to rise by 3.5 million bags to 36.3 million bags by Sept. 30, 2014.
The drought in Brazil will not result in a deficit of coffee but rather a reduction in available stocks.
Traditionally, year-end world stocks of 35 million 60 kg bags or higher are considered surplus and result in lower prices. Stocks of 25 million to 30 million 60 kg bags are considered tight and usually result in higher prices. Back in 2011, when world stocks fell to 25 million bags, coffee prices soared to more than $3 a pound.
But things are not all bad for Brazilian producers. The Brazilian crop may suffer by 10 to 20 percent but prices are up by nearly 60 percent, so Brazilian producers can still expect to gain much more than they lose.
Money managers caught this market early, reversing out of their net short positions in mid-January. Operators are currently net long 44,400 lots compared with net short 9,600 lots three months earlier.