Severe drought in Brazil has dashed hopes for yet another bumper coffee crop from the world’s top grower, a situation that is likely to keep arabica prices high this year.
Arabica coffee prices on the ICE Futures U.S. exchange are up 64% this year, with the contract for July delivery ending the week down 0.3% at $1.8190 a pound. Coffee roasters including Maxwell House Coffee, a unit of Kraft Foods Group (ticker: KRFT), and Mondelez International (MDLZ), which owns Gevalia, hinted in earnings calls this month that higher prices for consumers are on the way this year. Mondelez announced on May 7 that it was merging Gevalia into a joint venture with Dutch-based D.E. Master Blenders.
Brazil, the source of about half of the world’s arabica coffee, produced back-to-back bumper crops in the previous two years. This year, hot and dry weather has hurt coffee trees, and trade houses, analysts, and government agencies have slashed their forecasts for Brazil’s production, which many of them had initially expected to be a record. “My area is highly affected,” says Danilo Silva Fernandes, president of coffee cooperative Coopervitae in Minas Gerais, the top arabica-growing state in Brazil. He estimates Coopervitae’s production will fall by 30% this season to 7,000 bags of beans because coffee trees missed crucial rains in January and February.
Many Brazilian growers have said that while cherries have ripened to a deep red — normal for this time of year — when they are opened, there are no coffee beans inside.
Brazil’s government crop forecaster, Conab, say arabica growers would likely harvest 32.2 million bags of coffee beans, each weighing 60 kilograms (132 pounds) in 2014. That would be 16% less than last year.
To be sure, Brazil has warehoused coffee it can sell. Last year some growers chose not to sell their beans when prices fell to more than six-year lows, says Guilherme Braga, director-general of the Council of Brazilian Coffee Exporters. Those stockpiles will allow Brazil to export 5% more coffee this year than it did last year, he adds.
But, says Judy Ganes, the Panama-based president of J. Ganes Consulting, “that cushion is going to disappear when you take into consideration quality.”
THE DROUGHT STUNTED THE GROWTH of many coffee seeds, which means they are too small or undeveloped to be used in certain roasts. So while Brazil may increase its coffee shipments, it may not have enough of the right beans to satisfy some of the roasters. Arabica beans are used by high-end roasters such as Starbucks (SBUX) and Italy’s illycaffè.
Production in Central America appears to be in even worse shape. While the region accounts for less than 10% of global output, it is the source of some of the world’s rarest and most expensive coffee beans. An outbreak of coffee rust, a fungal disease that attacks the trees, has driven down production by an estimated 14% this year.
Ganes estimates that arabica prices could reach $3 a pound this year and says the global coffee market will likely tip into a supply deficit in 2015, one of the carryover effects of the Brazilian drought. High temperatures and dry weather prevent new vegetative growth, hurting the coffee trees’ ability to produce future crops.