Coffee futures soar as Brazil cuts harvest hopes

Coffee futures soared after Brazil slashed its estimate for its drought-hit coffee crop, saying its harvest will, for the first time since the 1990s, fall for two successive years and may fall for a third.

Arabica coffee for July delivery jumped to 197.75 cents a pound in New York before easing back to close at 196.80 cents a pound, a gain of 6.8%, rising back above the contract's 10-day and 50-day moving averages.

In London, robusta coffee for July closed 2.3% higher at $2,138 a tonne, ending back above its 10-, 20-day and 50-day moving averages.

While futures rose in early deals - helped by a forecast by analyst Judy Ganes-Chase to of a rise in arabica prices to 300 cents a pound - the rally gained pace after Brazil's official Conab crop bureau cut its estimate for domestic production to 44.57m bags.

"The somewhat-oversold arabica market was looking for a bullish input, and Conab provided it," said Citigroup analyst Sterling Smith.

The downgrade, from a forecast in January of a harvest of 46.53m-50.15m bags, leaves the country - for which 2014 is an "on" year in its cycle of higher and lower production years looking at a drop of 9.3% in output.

Not since 1995 has Brazil recorded a second successive drop in coffee production.

'Serious damage'

Conab attributed the drop in production primarily to the "severe drought recorded in early 2014" in much of Brazil, as well as  heavy tree pruning by farmers, who viewed the low coffee prices last year as a reason to take a production pause and invigorate plantations.

Brazil coffee estimates, change on year and (previous forecast)

Total production: 44.57m bags, -9.3%, (46.53m-50.15m bags)

of which arabica production: 32.23m bags, -5.8%, (35.08m-37.53m bags)

robusta production: 12.33m bags, 13.4%, (11.46m-12.62mbags)

Minas Gerais output: 22.99m bags, -16.9%, (15.88m-27.40m bags)

Espirito Santo output: 12.21m bags, +4.4%, (11.41m-12.61m bags)

Source: Conab

The main arabica coffee growing state of Minas Gerais took the brunt of the downgrade, with the harvest pegged at 22.99m bags, well below a previous estimate of 25.88m-27.40m bags.

Rains in December were followed by a "long and severe drought during the first quarter of 2014, throughout the state", Conab said, adding that the lack of rain and high temperatures caused "serious damage" to crops coming at the crop-filling stage "that defines size, weight and bean quality".

Although "moderate" rains had returned in March, the amount was not viewed as sufficient to reverse the water deficit or crop losses, although it had enabled applications of fertilizers, which rely on moisture for being taken into plants.

Better for robusta

However, output declines in some other states were far less severe, with the forecasts for production in Bahia and Sao Paulo falling within the range of Conab estimates in January, if at the lower end.

The crop in Espirito Santo, Brazil's top robusta growing state, was pegged at 12.21m bags, at the upper end of the initial estimate range of 11.41m-12.61m bags.

The state's robusta crop was seen rising by 13.9% year on year to 9.35m bags, helped by "favourable climatic conditions, especially in the northern region of the state".

In fact, Espirito Santo crops "have potential for greater production", although the lower and volatile prices for much of the season "have led many producers to decrease fertilizer applications".

Prospects for 2015

Conab also highlighted the damage done by drought to arabica potential for next year, in stunting the growth of new vegetation on which the 2015 crop will be borne.

The lack of rainfall had "possibly compromised 2015 crop production", with low vegetative growth "found in much of the coffee crop".

"Next year's harvest will at best be stable with this crop, but could be less," said Janio Zeferino, director of coffee at Brazil's agriculture ministry, echoing the warning earlier from Ms Ganes-Chase.

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