Growers Cut Back on Coffee and the Bulls Start Waking Up
By LESLIE JOSEPHS And ALEXANDRA WEXLER
Arabica prices on the ICE Futures U.S. exchange fell to their lowest levels since September 2009 on Wednesday. Above, a worker rakes coffee beans to dry during a harvest in Brazil.
Some investors smell opportunity in the biggest coffee-market bust in more than a decade.
Coffee-bean prices have fallen 54% in the past two years. The drop has been so steep that longtime coffee farmers are considering other uses for their land, in a move that some investors are counting on to reduce a coffee glut and drive a price rebound.
Prices for arabica coffee on the ICE Futures U.S. exchange fell to their lowest levels since September 2009 on Wednesday. These prices, which reflect roasters’ wholesale coffee costs, settled at $1.2275 a pound, down 3.9% on the day, the biggest one-day drop since April 23. Retail prices have declined less sharply.
Brazil’s government expects this season’s crop to be near a record. A worker displays beans at a factory there.
Benchmark arabica coffee prices are approaching the cost of production in top grower Brazil, and already have fallen below that point in other countries including Colombia, growers say.
“It is impossible to go on,” says Joaquim Libânio Ferreira Leite. He said his family has grown arabica coffee for seven generations in Brazil, but now is converting some land to cattle pastures. “No money, no coffee.”
Growers are nixing the planting of new trees and rationing the use of fertilizer. Mr. Leite, who is the export director of Brazil’s biggest coffee cooperative, which grows about 10% of the country’s crop, expects other co-op members to follow his lead.
“There is not one producer that can make money at current prices,” said Mark Nucera, president of M.A. Nucera, an Atlanta consulting firm that advises investors on commodities trades. “The prices are so terrible, you would expect less production” next season.
Mr. Nucera recently placed bets that arabica-coffee prices would rise. He expects the market to begin moving higher around October.
The tumble in prices is the product of two years of swelling coffee production in Brazil. Growers in the South American nation invested heavily in their farms as prices rallied to a 14-year high in 2011, expanding coffee-growing lands and planting high-yielding tree varieties.
When prices slid, they held on to some of their beans in hopes of pushing prices back up. But the bounce never materialized. As a result, farmers now have even more to sell as they start picking this season’s crop, which Brazil’s government expects to be near a record.
Fain Shaffer, president of Infinity Trading Group, a brokerage in Medford, Ore., recently bought arabica futures when they were hovering around three-year lows. He plans to continue placing bullish bets into July. That is when he expects the market to touch its seasonal low, with Brazil’s harvest in full swing.
“They’ll be spending less on inputs,” Mr. Shaffer said of the farmers. “I think we will see supplies tighten.”
He projects that the market will fall as low as $1.20 a pound over the short-term, but in 60 to 90 days, he expects prices to be higher as the market turns its focus to next season’s crop.
To be sure, other investors are betting that the slide in prices will continue. Bill Collard, an investor and president of the Futures Management Group, a brokerage in Fern Park, Fla., placed bets that prices would continue to fall, citing the massive supplies in Brazil and a tepid global economy that could muffle growth in consumption. “It’s been a very profitable trade,” he said. “It’s been straight down.”
Levels hit this month “will be looked upon by the industry as a legendary low,” said Hackett Financial Advisors President Shawn Hackett, who has been trading coffee for about a decade.
Prices of robusta coffee, the more bitter, easier-to-grow variety of bean often used in instant coffee, also have slid due to large supplies from Vietnam, the world’s biggest grower of the variety. Robusta on the NYSE Euronext NYX +0.37% settled at $1,780 a metric ton Wednesday, the lowest point in 17 months.
Big coffee-growing countries are helping farmers ride out the bust through direct subsidies and free farming supplies, which ultimately could smooth out price volatility.
Under pressure from growers’ groups and regional governments, Brazilian officials recently raised the minimum price for coffee to 307 Brazilian reais ($142) per 60-kilogram (132-pound) bag, which translates to $1.0794 a pound, for the first time in four years.
Analysts say additional financing also could allow growers to be more disciplined when selling their crop, which would push prices higher. “It takes a little bit of the pressure off from a complete flooding of the market,” said Kona Haque, head of agricultural research at Macquarie Bank MQG.AU -1.09% .
Write to Leslie Josephs at leslie.josephs and Alexandra Wexler at alexandra.wexler