Talk of decent Brazil coffee harvest dents prices

Coffee futures made a poor start to the week, tumbling to their lowest in more than four months, amid talk drought damage to the Brazilian harvest may not be as bad as had been feared.

Arabica coffee for September fell 3.3% at one point to 166.10 cents a pound, its lowest since February, before recovering some ground to stand at 168.90 cents a pound in late deals, down 1.7%.

The decline was attributed to ideas that Brazil's crop prospects were not as poor as had been feared, after the early-2014 drought, with Jefferies Bache, in an article in Barrons, forecasting a harvest largely in line with last year's, and INTL FCStone foreseeing prices potentially falling to 150 cents a pound.

At Citigroup, Sterling Smith told "It is true that supplies right now really are quite good."

Higher prices have lured the sale of beans left over from the 2012 and 2013 harvests, besides the boost to supplies from this year's continuing harvest, now about half completed.

At broker Price Futures, Jack Scoville said: "Farmers in Brazil are selling and exporting crops from the previous year to make up for any shortfalls in the current production."

'Malformed beans consistently'

However, Mr Smith voiced caution over expectations of the decline in futures lasting, saying that his intelligence showed that "reports from on the ground in Brazil over the weekend continue to indicate lighter, smaller and malformed beans consistently".

Supplies were lightly to "tighten up" as the season proceeds and stocks are run down, he said, adding that "I do think we will see higher prices".

While some coffee bears have pointed to a decline in hedge funds' net long position as evidence of speculators' reduced willingness to continue betting on higher prices, Mark Nucera, a longstanding coffee bull, flagged a reduction in the net short held by commercial investors.

Commercial investors reduced by 1,645 contracts to 73,322 lots their net short in arabica coffee futures and options in the week to July 1, contrasting with a drop of 1,294 contracts in the net long held by managed money, a proxy for speculators, according to the CFTC regulator.

CFTC data cut into the "producers, merchants, processors and end user" category saw a reduction of 1,454 contracts to 66,495 lots in their net short in arabica futures and options.

Smart vs smarter

"Commercials are buying coffee. You don't normally see that at this time of year," Mr Nucera said, with harvest periods in the "commercial category" typically marked by producer selling.

"And they know what physical supplies are coming out in the market."

The "smart money", as in hedge funds, "may be getting shorter in their arabica positions, but the smarter money is getting longer".

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