Saturday, April 30, 2011

Coffee May Climb 40% on Brazil Frost Risk as Kraft, Smucker Raise Prices

Brazil, the world’s biggest coffee grower, is facing the risk of frost after hail this month, raising the prospect of a 40 percent jump in bean costs after Kraft Foods Inc. (KFT) and J.M. Smucker Co. already increased prices.

The chance of frost in Brazil increased with the weakening of La Nina, a cooling of waters in the Pacific Ocean, Brazil’s Somar Meteorologia said this week. Frost in 1994 damaged 35 percent of the crop by 1997, sending prices up 39 percent that year, according to Somar. Should cold weather damage trees this year, coffee may rise to a record $4.20 a pound, the median in a Bloomberg survey of 11 analysts, traders and investors.

Arabica beans have jumped 25 percent this year on signs demand is outpacing supply. The shortage will be 6.2 million bags in the crop year starting in October, according to Rabobank International. Kraft, maker of Maxwell House coffee, raised prices three times last year. It estimated in February that North American commodity costs would increase $700 million to $800 million this year, or about 1.5 percent of 2010 revenue.

“There is no room for disruption,” said Rodrigo Costa, vice-president of institutional sales at Newedge USA LLC in New York, who correctly forecast a year ago that coffee would climb. “If Brazil has a frost, not only will we see uncharted prices but the situation might become unbearable.”

Arabica-coffee futures for July delivery closed at $2.9985 a pound in New York. Yesterday, the price surged to a 14-year high of $3.034 and has more than doubled in the past year. Cocoa futures are up 4 percent for the same period, and raw sugar is 46 percent higher.

Folgers Coffee

Kraft, based in Northfield, Illinois, increased U.S. prices on Maxwell House and Yuban ground coffees by about 22 percent on March 16, spokeswoman Bridget MacConnell said. Orrville, Ohio- based Smucker, maker of Folgers coffee, raised them by 10 percent in February, Vincent Byrd, director and president of U.S. retail coffee, said on a conference call that month.

Global food costs tracked by the United Nations reached an all-time high in February and the World Bank says that contributed to 44 million more people being driven into poverty in the past year. Inflation is accelerating worldwide, spurring central banks from China to the euro region to increase interest rates, potentially curbing consumer spending.

Arabica coffee, preferred by coffee shops such as Starbucks Corp., climbed as rains associated with La Nina damaged crops in Colombia, the fourth largest producer last year, according to the U.S. Department of Agriculture. Brazil’s crop will be 13 percent smaller than last year, Brazil’s Agriculture Ministry estimates.

Colder Atmosphere

La Nina is now declining and all climate models suggest further weakening, Australia’s Bureau of Meteorology said on April 27.

“As La Nina fades and the atmosphere becomes colder, the cold masses from the South Pole gain intensity and may reach the Center South region” of Brazil, Marco Antonio dos Santos, an agronomist at Somar in Sao Paulo, said on April 27. The Center South includes the state ofMinas Gerais, Brazil’s biggest grower of arabica beans.

Cold weather from the South Pole is due in the Center South in the week of May 9 and temperatures are forecast to fall to about 5 degrees Celsius (41 degrees Fahrenheit), Santos said. Coffee trees can be damaged if temperatures fall below 1 degree Celsius, he said.

Frost in Brazilian growing regions can damage trees bearing the following year’s crop. Coffee futures soared to a record $3.375 a pound in 1977 after damage from the “black frost” in Brazil two years earlier, according to Bloomberg data.

“Even without weather disruptions there will be a deficit,” Newedge’s Costa said.

April Hail

There was hail this month in some Brazil growing regions, and the damage was estimated at 50,000 to 60,000 bags, according to Somar. Brazil produced 55.5 million bags last year, according to the USDA. This year’s crop is estimated at between 41.9 million bags to 44.7 million bags by Brazil’s Agriculture Ministry.

“The wild card will be the weather in Brazil,” said Walter “Bucky” Hellwig, who helps oversee $17 billion at BB&T Wealth Management in Birmingham, Alabama and correctly forecast higher gold and oil prices in February. “If Brazil does not have a big crop we will see pressure on prices.”

The earliest frost to damage the crop in Brazil was May 31, 1979, according to Newedge estimates. Brazil’s winter season traditionally extends through August. While Brazilian coffee isn’t deliverable against futures contracts in New York, it’s used in blends by roasters.

Falling Inventories

Stockpiles in producing countries have been falling since 2003, when inventories were at 52.7 million bags, data from the London-based International Coffee Organization show. The 13 million bags in storage now represent 1 1/2 months of global exports, the lowest in at least half a century, according to Jose Sette, the ICO’s executive director.

Inventories in producing nations are 69 percent lower than in 1997 and 71 percent lower than in 1977, years in which coffee prices climbed following frost damage, according to ICO data. Stockpiles were 42 million bags in 1997 and 45 million bags in 1977, Sette said.

“Given what frosts have done to prices in the past, coupled with the tight inventories of arabica, the upside potential if there is a frost is extreme, and records are very likely to be broken,” said Keith Flury, an analyst at Rabobank in London.

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