Commodities

Coffee traders on edge as cold wave threatens global supplies

Boomberg | Updated on July 29, 2021

Futures surge 60 per cent this year, making it one of the best performers among commodities.

Price swings for arabica coffee are the biggest in nearly two decades, with traders nervously tracking the approach of a cold wave that’s threatening global supplies.

Futures for the high-end beans have surged about 60 per cent this year, making it one of the best performers among commodities.

“The market has to be on edge,” said Nick Gentile, managing partner for NickJen Capital Management in New York. “You can’t be short here.”

Read also: Coffee growers unlikely to gain from global price hike

Temperatures will begin to descend in the next 24 hours in southern Brazil, bringing the highest risk of frost from Thursday to Friday morning, according to Maxar Technologies Inc. Coffee and cane areas of Parana are especially vulnerable, with temperatures dropping to about 27 degrees Fahrenheit by Friday. The chill will last a few hours, said senior meteorologist Donald Keeney.

Top-growing coffee region South Minas Gerais may get readings of around 31 degrees Fahrenheit, enough to cause damage, Keeney said. Temperatures will warm from Saturday, and with no chill threat next week.

Brazil’s arabica crops alternate between a high-yielding crop and a low one each year. The most recent frosts are curbing the outlook for 2022, a high-yielding year, when the nation could account for nearly half of global supplies. Minas Gerais grows nearly 70% of that. Brazil is also the second-biggest consumer after the U.S.

If the expected frost doesn’t materialize, the market could go into a temporary free-fall, said Gentile, marking “a buying opportunity ahead of more threats.” Higher margin requirements by ICE Futures U.S. probably led some traders to pare bullish positions in order to avoid paying up to maintain them, he added.

Rabobank International analyst Guilherme Morya said the market may be overbought. The frost could touch areas that were already destroyed during the last two, lessening the blow.

Surges in wholesale prices often take time to reach consumers, with major companies mitigating the impact of price volatility by hedging their needs. Starbucks Corp. said in a call with analysts Tuesday that it currently has 14 months of supplies covered.

Arabica-coffee futures for September delivery slipped as much as 3.3% and rose as much as 1.8%. The 10-day historical volatility is at the highest since 2002.

In other commodities, raw sugar for October delivery also jumped as much as 1.5%, holding at the highest levels since 2017.

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Published on July 29, 2021

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