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Smucker lifts coffee price - as futures enter bear market

Here's a tip for coffee investors consider betting the opposite way on prices to the way JM Smucker prices are going.

The snacks group revealed the first rise in coffee prices in three years, citing strong bean costs even as the rally in futures entered a bear market.

Indeed, the Ohio-based group, known in coffee for the Folgers and Dunkin' Donuts brands, continued something of a theme of being a contrarian indicator for coffee prices, short-term.

'Sustained increases in coffee costs'

JM Smucker said that it had raised the price of most of its products in the segment by 9% "in response to sustained increases in green coffee costs".

The price increase, which excludes the K-Cup capsules, is the first since May 2011, since when SM Smucker has cut coffee prices three times.

However, global coffee markets have soared this year, with New York arabica bean futures hitting 207.55 cents a pound in March, the highest since February 2012.

Futures stood at 136.50 cents a pound in February 2013, at the time of JM Smucker's last price decrease.

Recovering estimates

But, ironically, Tuesday's price rise came as a retreat in futures from their March high dragged them into a bear market, with their fall topping the 20% mark typically seen as defining such a decline.

At 168.85 cents a pound for July delivery, down 2.0% on the day, arabica coffee futures are down 22% from their peak.

The drop has been attributed to a series of less gloomy estimates on Brazil's losses to an early 2014 drought, with trader Mercon, for instance, last week pegging output at 50.5m bags, some 10m bags above the bottom-of-the-range forecast.

"We were pleasantly surprised on the general aspect of the trees and how they had recovered compared with the previous trips during the year," Mercon said, following crop tours.

Interagricola, affiliated to soft commodities trader Ecom, has pegged the crop at more than 51m bags.

Contrary indicator?

At Citigroup, analyst Sterling Smith said that JM Smucker's move could be hastening the drop in coffee prices, saying that the price rise, which stands to curtail demand, "may be adding to a little to the bearish sentiment".

That would extend something of a theme of the snacks group proving a contrarian indicator, with last February's price cut heralding a rise of some 5% in arabica coffee futures over the following three sessions.

While the previous price drop, in May 2012, preceded only a small rise in arabica coffee futures, of 0.9% in two sessions, the cut before that in mid-August 2011 would have been a highly profitable signal for the contrarian investor.

Prices rose more than 15% over the next 12 sessions.

Market too optimistic?

Still, there is some expectation that the fall in prices this time might not prove sustained, with Mr Smith saying that "as long as the market holds the 167.00 cents-a-pound area on a closing basis, fund liquidation en masse should not be the case".

"Ideas that late season rains did in fact improve the crop is questionable," he said, estimating Brazilian production "in the sub-45m bag area".

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