By
Leslie Josephs and Alexandra Wexler
October
8, 2012
Brazil's
coffee farmers have been hoarding some of their crop, waiting for the right
price. But buyers are testing their patience.
Coffee
has been trickling out of No. 1 supplier Brazil more slowly than usual this
year. The Brazilian government estimates that the annual coffee harvest that
wrapped up last month is a record, but the South
American country's exports are down on the year. The reason: Farmers haven't
been happy with prices, which hit two-year lows in June.
But big coffee buyers like Folgers-maker J.M. Smucker Co. are in
no rush to buy. Global stockpiles of arabica beans, the coveted variety used in
gourmet blends, are at their highest level in more than two years. Meanwhile,
coffee demand is slowing due to the woes in Europe and more supplies are
expected in the coming months.
The situation stands in contrast to 2011, when coffee roasters and
food companies were scrambling to secure supplies amid a shortage of beans that
drove prices to 14-year highs.
The result is a "tug of war" between buyers and sellers,
said Hector Galvan, a senior broker at R.J. O'Brien Futures in Chicago.
"The coffee's there, but it's just not moving."
Roasters that produce most of the coffee that ends up in tins and
jars on supermarket shelves are heavily reliant on Brazilian beans. But even
with some growers there holding back, companies don't appear to be short.
"We have sufficient supply to meet our production demands
across our coffee portfolio," said a spokeswoman for Smucker.
Traders' anticipation of Brazil's big crop sparked a selloff in
the first half of 2012, making coffee one of the worst-performing commodities.
The falling prices benefited coffee drinkers, though, who saw
lower retail prices on supermarket shelves.
The selloff was an unwelcome jolt to farmers used to last year's
multiyear highs. And many are holding onto some of their harvest in response.
Brazil's arabica-coffee exports are down 17% through September.
This is the first year since 2008 that exports haven't risen year on year over
that time period. Brazil this year produced an estimated 50.48 million bags of
coffee, according to Brazil's government crop agency Conab.
But some investors say time is running out for Brazil's farmers.
Growers in Colombia and Central America are gearing up for their harvest, which
will add millions of bags of coffee to the market.
Bill Collard, president of Futures Management Group in Fern Park,
Fla., started betting on falling coffee prices when futures got up to $1.75 a
pound last week. "There's a lot of harvest pressure," Mr. Collard
said. "It will be producer selling" that puts a lid on any price
increases.
For now, though, farmers like 34-year-old Diogo Dias Teixeira de
Macedo are holding their ground. "We've sold about 20% of production so
far," said Mr. Teixeira, who farms 220 hectares of coffee in the mountains
of southeastern Brazil. "At this time, we'd normally have sold 50%."
Futures have risen as much as 27% from June's two-year low of
$1.4920 a pound, a rally that analysts and traders attributed partly to
Brazilian farmers' reluctance to release supplies.
Arabica coffee for delivery in December on ICE Futures U.S.
settled Monday at $1.6910 a pound, up 0.6%, or 1 cent on the day.
Gourmet-coffee roasters once viewed Brazilian beans as an
afterthought, a low-cost staple used to round out the flavor of more powerful
varieties. But Brazil's coffee has gained popularity in recent years as quality
improved. Starting with the March 2013 contract, some Brazilian beans can be
used to fulfill futures contracts, a sign of widespread acceptance.
Mr. Teixeira can afford to wait because a government-managed
coffee fund offers loans to farmers so they don't have to sell coffee right
away to pay their bills.
To be sure, Colombia and Central America's harvests could put less
pressure on prices than some traders anticipate.
"We are now getting ready to price in a substantial [global
coffee] deficit" because Brazil's harvest next year is likely to be smaller
than this one, said Shawn Hackett, president of brokerage and consultancy
Hackett Financial Advisors. Brazil has a biennial coffee cycle with alternating
years of higher and lower output. Mr. Hackett has placed bets that prices of
coffee for December delivery will rise and expects prices to hit $2 a pound by
year-end.
But others believe Brazilian supplies will make their way out of
local warehouses sooner rather than later, driving prices down. John Rich, a
broker at Sarasota Futures, recently made an options bet on coffee prices
staying below $1.85.
Once selling by Colombia and Central America begins, Brazil's
farmers who have been holding out are likely to follow suit, said Spencer
Patton, founder of Steel Vine Investments in Nashville, Tenn. "I don't
expect that the play is going to pay off for the Brazilian farmers that are
holding onto their crops.
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Paul Kiernan
contributed to this article.
Write to Leslie Josephs at leslie.josephs@dowjones.com and
Alexandra Wexler atalexandra.wexler@dowjones.com