Coffee Prices Up on Weather Speculation – Brazil Quarterly Climate Forecast

Coffee C (Arabica Coffee) has continue moving higher after reaching the lower prices not seen since 2008. The bounced back has been emphasised after reports of persistent drought will harm coffee production in Brazil.

The International coffee organization reported that much of the recent price support has been due to speculation over the size of the upcoming Brazilian crop. The first estimate by Conab of the 2014/15 crop gives a forecast of 46.53 to 50.15 million bags, with an average of 48.34 million. If realised, this average would represent two consecutive decreases in Brazilian coffee production for the first time since 1977, and would suggest that the significance of the traditional biennial cycle of production is waning.

Brazil is the largest producer of Arabic Coffee and plantations are mainly located in the south eastern states of Minas Gerais, Sao Paulo and Parana where the climate is ideal for growing coffee plants.

The Brazilian  INMET (El Instituto Nacional De Meteorologia)  released in January its quarterly climate forecast:

“The month of December was marked by excess rain in part of the Southeast and Northeast Brazil especially in eastern Minas Gerais and Holy Spirit, where the performance of the Zone South Atlantic convergence (SACZ) caused an increase the volume of rain and serious trouble to the population.

On the other hand, the sparse rains continued north of the Northeast. In Rio Grande do Norte, particular, almost all the municipalities declared a state of emergency because of prolonged drought.

The analysis of the global ocean and atmospheric fields, for December 2013 precursors showed signs of both drought years as years with above average rainfall in Northeast.

Standards intraseasonal variability may also increase or inhibit the occurrence of rain over the northern region Northeast and Southeast of Brazil in the coming months emphasizing the spread of a favorable signal to increased rainfall in early February 2014, on these areas”

The last part of the statement is a bit uncertain but not so dramatic as it has been reported in other business news section online.

Furthermore the statement from Instituto Nacional De Meteorologia in Brazil continues with the quarterly consensus forecast for the Feb – April 2014: “ indicated the following distribution of probabilities for the occurrence of total rainfall for the north the Northeast Region , which includes the east-central Piauí , Ceará , west Rio Grande do Norte , Paraíba and Pernambuco semiarid and north of Bahia : 25 % , 40 % and 35 % of rainfall is situated in categories above , within and below the normal range for climatological this period , respectively. For a track located in northern Northern Region , from Amapá , Pará northeast to northwest Maranhao, the highest probability of occurrence is also of total rainfall in the category within the normal range , with distribution probability of 35 %, 40% and 25% for the above categories , within the normal range and below , respectively. For this quarter, positioning systems typical of the summer months, associated with the movement of summer in the upper troposphere can contribute to increasing irregularity in the spatial distribution and time of the precipitation anomalies over northern Region Northeast . To the west of the southern region , the forecast models climate indicate greater likelihood of total rainfall in the period around the normal range , with probability distribution of 25% , 40% and 35% of rainfall fall between the categories above , within and below the normal range respectively. For other areas of Brazil, the forecast indicated equal probability for all three categories.”

clima_brazil
Translation: Abaixo da faixa norma, Below the normal range.
Translation: Acima da faixa norma, Above the normal range.
Translation: Area cinza, O Pronostico de Consenso indica comportamento climatologico (igual probabilidade para as três categorias.) Grey Area, pronostico consensus indicates the climatological behavior (equal probability for all three categories.)

Technically

It seems that investors have reacted to coffee news and soon will find out that worldwide coffee production is still high and could emulate 2013-14 production levels.

The fact that prices are souring based only on speculation it could be a good opportunity, a very risky opportunity to open a short position on CFD but the time to short hasn’t come yet. Nor until further reports about coffee production confirm either a lower production year (in which case not point shorting) or a stable to high production, then shorting would be the way to go.

As of today; prices have reach an important resistance level at $143. Support level stand at $134 and prices could zig zag in between and consolidated before extending gains or retreating lower.

Available information on fundamentals factors are not yet strong to back the sudden increase. It has been only a month and a half when coffee prices were punished for an increase in supply. The sudden sentiment change is yet to be confirm.

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