El Niño withers coffee prospects for investors

DRY WEATHER across coffeeproducing regions is starting to diminish the outlook for this year’s crop and forcing investors to trim their bets that prices will fall.

Below-average rain is forecast for the next 10 days in Brazil’s Espirito Santo state, a region that saw yields decline over the past two years, according to MDA Weather Services. In Colombia, growing areas got as little as 10% of normal precipitation during the past month. The countries are the world’s top growers of arabica coffee.

Prices have rebounded almost 5% from a two- year low last month. The lingering El Niño weather pattern is bringing dry conditions as inventories are already depleting in Brazil, the biggest exporter. At the same time, the US Department of Agriculture forecasts that world demand will climb to a record this season. Hedge funds and other speculators cut their bearish wagers for the first time in three weeks.

“Coffee is one of those commodities where the demand is very solid, and its price depends to a certain extend on what the harvests have been doing,” said Frances Hudson, an Edinburghbased global thematic strategist at Standard Life Investments, which oversees $ 393 billion. While El Niño occurred most of last year, “its impact will be felt for a while longer,” she said.

Arabica is primarily grown in Latin America and brewed by specialty companies including Starbucks Corp. Robusta beans, used in instant coffee, are harvested in Asia, Latin America, and parts of Africa.

Global production will trail demand by 3.4 million bags in the 2015-16 season, Marex Spectron Group, a London- based brokerage, said in January. That’s up from a November estimate of 2.79 million bags. A bag weighs 60 kilograms.

The tightening supply situation is a reversal from 2015. Coffee prices tumbled 24% last year, the biggest annual drop since 2012.