By Leslie Josephs and Alexandra Wexler
June
12, 2013
Some
investors smell opportunity in the biggest coffee-market bust in more than a
decade.
Coffee-bean
prices have fallen 54% in the past two years. The drop has been so steep that
longtime coffee farmers are considering other uses for their land, in a move
that some investors are counting on to reduce a coffee glut and drive a price
rebound.
Prices
for arabica coffee on the ICE Futures U.S. exchange fell to their lowest levels
since September 2009 on Wednesday. These prices, which reflect roasters'
wholesale coffee costs, settled at $1.2275 a pound, down 3.9% on the day, the
biggest one-day drop since April 23. Retail prices have declined less sharply.
Benchmark
arabica coffee prices are approaching the cost of production in top grower
Brazil, and already have fallen below that point in other countries including
Colombia, growers say.
"It
is impossible to go on," says Joaquim Libânio Ferreira Leite. He said his
family has grown arabica coffee for seven generations in Brazil, but now is
converting some land to cattle pastures. "No money, no coffee."
Growers
are nixing the planting of new trees and rationing the use of fertilizer. Mr.
Leite, who is the export director of Brazil's biggest coffee cooperative, which
grows about 10% of the country's crop, expects other co-op members to follow
his lead.
"There
is not one producer that can make money at current prices," said Mark
Nucera, president of M.A. Nucera, an Atlanta consulting firm that advises
investors on commodities trades. "The prices are so terrible, you would
expect less production" next season.
Mr.
Nucera recently placed bets that arabica-coffee prices would rise. He expects
the market to begin moving higher around October.
The
tumble in prices is the product of two years of swelling coffee production in
Brazil. Growers in the South American nation invested heavily in their farms as
prices rallied to a 14-year high in 2011, expanding coffee-growing lands and
planting high-yielding tree varieties.
When
prices slid, they held on to some of their beans in hopes of pushing prices
back up. But the bounce never materialized. As a result, farmers now have even
more to sell as they start picking this season's crop, which Brazil's
government expects to be near a record.
Fain
Shaffer, president of Infinity Trading Group, a brokerage in Medford, Ore.,
recently bought arabica futures when they were hovering around three-year lows.
He plans to continue placing bullish bets into July. That is when he expects
the market to touch its seasonal low, with Brazil's harvest in full swing.
"They'll
be spending less on inputs," Mr. Shaffer said of the farmers. "I
think we will see supplies tighten."
He
projects that the market will fall as low as $1.20 a pound over the short-term,
but in 60 to 90 days, he expects prices to be higher as the market turns its
focus to next season's crop.
To
be sure, other investors are betting that the slide in prices will continue.
Bill Collard, an investor and president of the Futures Management Group, a
brokerage in Fern Park, Fla., placed bets that prices would continue to fall,
citing the massive supplies in Brazil and a tepid global economy that could
muffle growth in consumption. "It's been a very profitable trade," he
said. "It's been straight down."
Levels
hit this month "will be looked upon by the industry as a legendary
low," said Hackett Financial Advisors President Shawn Hackett, who has
been trading coffee for about a decade.
Prices
of robusta coffee, the more bitter, easier-to-grow variety of bean often used in
instant coffee, also have slid due to large supplies from Vietnam, the world's
biggest grower of the variety. Robusta on the NYSE Euronext NYX +0.37% settled at $1,780 a metric ton
Wednesday, the lowest point in 17 months.
Big
coffee-growing countries are helping farmers ride out the bust through direct
subsidies and free farming supplies, which ultimately could smooth out price
volatility.
Under
pressure from growers' groups and regional governments, Brazilian officials
recently raised the minimum price for coffee to 307 Brazilian reais ($142) per
60-kilogram (132-pound) bag, which translates to $1.0794 a pound, for the first
time in four years.
Analysts
say additional financing also could allow growers to be more disciplined when
selling their crop, which would push prices higher. "It takes a little bit
of the pressure off from a complete flooding of the market," said Kona
Haque, head of agricultural research at Macquarie Bank MQG.AU -0.92% .
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Write to Leslie Josephs at leslie.josephs@dowjones.com
and Alexandra Wexler at alexandra.wexler@dowjones.com
A version of this
article appeared June 12, 2013, on page C1 in the U.S. edition of The Wall
Street Journal, with the headline: Growers Cut Back on Coffee, And the Bulls
Start Waking Up.