Winner becomes loser as rain revives coffee supply

Coffee, the best-performing commodity of 2014, is ending the year in a bear market that shows few signs of ending.

Prices that doubled this year by October fell 13 percent in the past two months as rains aided parched trees in Brazil, the world's top grower. November was the wettest month of the year, after the worst dry spell in eight decades forced Starbucks Corp. and Folgers to charge more for their coffee.

Ecom Agroindustrial Corp. predicts the 2015 crop will be at least 25 percent bigger than the National Coffee Council's July forecast, and farmers are exporting more as Brazil's currency weakens against the dollar. While Brazil heads for its first three-year output drop since 1965, the easing drought renewed investor attention on a global surplus as production exceeds demand for a fifth straight season. Hedge funds have cut their bullish bets on prices by 35 percent since mid-October.

"We are a bit more bearish on coffee now," said Paul Christopher, the St. Louis-based chief international strategist at Wells Fargo Advisors, which oversees $1.4 trillion. Prices may drop 9.2 percent further by April to $1.50 a pound in New York, he said. "The November rainfall was pretty good, and we also have adequate global supplies."

Arabica-coffee futures tumbled 12 percent this month to $1.6515, paring this year's advance to 49 percent. While that's twice the gain for cattle, the next-biggest increase among the 22 items tracked in the Bloomberg Commodity Index, only crude oil, gasoline and heating oil fell more in the past 10 weeks. The MSCI All-Country World Index of equities rose 3.1 percent this year, while the Bloomberg Dollar Spot Index surged 11 percent.

Coffee probably will slip to $1.582 before March 31, according to the average estimate in a Bloomberg survey of 17 analysts.

The crop that Brazilian farmers will harvest from May to October will reach 50 million bags, Pully, Switzerland-based Ecom, the second-largest trader, said Dec. 10. The forecast was matched the same day by Brazil-based Exportadora de Cafe Guaxupe Ltda. In July, the National Coffee Council, said output would drop below 40 million bags, the smallest since 2009. Each bag weighs 60 kilograms, or 132 pounds.

In Minas Gerais, the top producing state, farmer Jos� Maria Pontes said the wet weather means he will boost production by 22 percent to 5,500 bags next year on his 234-hectare farm in Monte Santo de Minas. "As the rains came in November, I became more optimistic," he said.

With the harvest still months away, there's still a risk to supply. Citigroup Inc. predicts coffee will average $2.15 in the first quarter as Brazilian output drops. Rabobank International forecast $1.95 in the first quarter before climbing to $2 in the second.

"The rains did help plantations recover in Brazil, but they didn't fix the problem," said Thiago Cazarini, president of Cazarini Trading Co., a broker in Varginha, Minas Gerais. "A lot of the fruit will not develop, and that could lead the market up."

At the same time, global demand has never been higher, with expanding sales in the U.S., Asia and Europe. Consumption will reach a record 147.6 million bags in the marketing season that began in October for most producers, up 3.7 percent from a year earlier, the USDA estimates. Volcafe Ltd., a coffee trader, estimates demand will exceed harvests by 9.9 million bags in season that began Oct. 1, compared with a surplus of 7.4 million a year earlier.

Global output has exceeded demand for five straight seasons, according to the U.S. Department of Agriculture. Supplies are getting a boost from harvests in Central America and Colombia, where output will rise this year to the highest since 2008, the USDA estimates.

High prices have sparked a surge in exports, boosting inventories of arabica beans at ports in consuming countries as of Sept. 30 by 2.3 million bags from a year earlier, the most since at least 2011, Volcafe estimated in a November report. As of November, farmers in Brazil sold 65 percent of the harvest for delivery next year, up from 55 percent a year earlier, forecaster Safras & Mercado said Dec. 11.

In the U.S., the largest consumer, stockpiles of unroasted raw beans reached a nine-year high in July and are heading for a fourth straight annual increase, which would be the longest since 1992, industry data show. Seattle-based Starbucks, the largest coffeehouse owner, has secured about 65 percent of its coffee needs for 2015, according to Haley Drage, a spokeswoman.

"There's no concern for nearby supply in the U.S.," George Kniesel, a vice president for commodities at Massimo Zanetti Beverage Group, the maker of Chock Full O'Nuts and Hills Bros. coffee, said in a telephone interview from Suffolk, Virginia. "Roasters have very good coverage. You're able to buy coffee throughout next year today, if you want to."