Arabica futures jump on Brazil drought, robusta declines

Arabica futures rose on Tuesday after falling to a two-week low on Monday as prices continued to draw support from expectations for a shortage in arabica beans after dry weather in Brazil curbed output. Robusta fell as inventories in Vietnam reached a record high.

On the ICE Futures U.S. exchange, Arabica coffee for delivery in May rose by 0.60% to $1.9235 per pound by 14:14 GMT. Prices shifted in a daily range between $1.8910 and $1.9655 per pound. The contract fell by 3.5% on Monday and settled the session at $1.9140. Prices slid 3% on Friday but closed the week 0.8% higher, having hit a two-year high of $2.0975 a pound on Wednesday. Arabica is up 77% in 2014 following three straight years of losses, making it the top performer in the Standard & Poor’s GSCI gauge of 24 commodities. Prices fell 23% in 2013.

Meanwhile in London, Robusta futures for settlement in the same month fell by 0.83% to $2 144 per ton by 14:24 GMT. Prices varied in a daily range between $2 151 and $2 136 a ton. The contract lost 0.8% on Monday after it closed 0.5% lower on Friday but settled the week 3.8% higher, having hit a one-year high of $2 218 on Wednesday.

Arabica continued to draw support as dry conditions in Brazil spurred fears of insufficient global supply. According to data by Volcafe Ltd., a Swiss unit of commodities trader ED&F Man Holdings Ltd., global demand for arabica beans will outstrip supply by 5.3 million 60-kilogram bags in the 2014-2015 period, while shortages of the robusta variety will amount to 1.2 million bags.

Brazils National Institute of Meteorology reported earlier in the month that the countrys southeast including its top producing state, Minas Gerais, is experiencing the driest summer since 1972.

Due to the smaller deficit, robusta has rallied 27% this year, while its discount to its more expensive peer tripled, hitting the highest in two years. Arabica traded at a premium of $1.087 per pound to robusta, the widest since March 2012. The gap raised speculations that roasters may switch to the cheaper variety, which would eventually raise its price.

As a result, coupled with speculations that drought will reduce next years harvest, coffee growers in Vietnam, the largest producer of robusta coffee, are holding back sales and keeping record inventories. Growers have sold 50% of their record harvest that amounted to 1.7 million tons in the year started October, 10% below the average of the previous five years. According to data compiled by Bloomberg, inventories surged to 850 000 tons in the seven days through March 7th, a record for this time of the year.

However, easing shortage concerns to some extent, Brazil’s coffee export association Cecafe said last week that the nations ample inventories from the previous harvest will ease the effects of this years severe drought and also help boost exports by 6%. According to Cecafe, Brazils outbound shipments should jump to 33 million bags in 2014, up from 31.1 million in the preceding season.

ABN Amro said in an e-mailed report, cited by Bloomberg: “Substitution conversations have picked up, but are difficult to quantify just right now. If we have an extended period of time where the arb holds at these kind of levels there will be a switch. The problem as always for the larger roasters is being able to respond in a reasonably timely manner, if at all.”