(Bloomberg) -- Coffee hit a record high in New York on mounting worries over a global supply crunch that have made it one of the year’s hottest commodities.
Major trader Volcafe Ltd. cut its outlook for production at world’s top supplier Brazil after a crop tour revealed the severity of an extended drought. The country is seen producing just 34.4 million bags of arabica, the variety that’s favored in specialty brews. That’s down by about 11 million bags from a September estimate, according to a presentation seen by Bloomberg News.
Global coffee production is on track to fall short of demand by 8.5 million bags in the 2025-26 season, marking an unprecedented fifth year of deficits, Volcafe said.
Futures for the arabica variety have surged more than 80% this year amid crop setbacks in key growers, threatening to further pinch consumers’ pockets. They rose as much as 5.5% on Tuesday, touching the highest in data going back to 1972 and eclipsing a peak set that decade when a disastrous so-called Black Frost decimated Brazilian trees.
Fears have now grown about future supplies in top grower Brazil after a lengthy dry spell earlier this year. That’s in addition to worries about output in Vietnam — the largest producer of the cheaper robusta bean — after its key coffee belt suffered from dryness during the growing period and heavy rains arrived at the start of harvest.
A series of disappointing coffee harvests in key producers has led to a reduction in global coffee stockpiles over the past four years. Meanwhile, China has emerged as a new and fast-growing consumer market.
“Coffee production has struggled to meet rising demand” amid growing consumption in China, Ole Hansen, head of commodities strategy at Saxo Bank, said in a Tuesday note. Concentration of production in a few countries including Brazil and Vietnam makes the commodity particularly vulnerable to adverse weather conditions, he added.
The rally risks further raising costs for roasters and cafes, which may have to pass them on to consumers. Facing a squeeze, sellers have already raised prices and scrapped discounts to protect their margins. Coffee giant Nestle SA said in November that it will raise prices and make packs smaller to blunt the impact of more expensive beans.
Arabica futures were up 4.7% at $3.4570 a pound as of 10:50 a.m. in New York. Prices surpassed the previous all-time high set in 1977, when the market was rattled by Brazil’s devastating frost of 1975 that impacted future crops.
“We are currently experiencing a strong fundamental phase in the coffee market, which we expect to sustain the elevated price levels,” said Viktoria Kuszak, research associate at Sucden Financial.
Other parts of the coffee chain are also feeling the pressure of soaring prices. When prices rise, brokers require producers and exporters to put up more cash in the form of margin deposits to cover possible losses — making it more expensive to hedge using the futures market.
And some traders who sold futures are forced to buy them back to step away from the market, sending prices even higher in a vicious cycle.
Coffee’s rally has pushed arabica’s 14-day relative strength index above 70, which can suggest that the market has become overbought. The move higher has also been accompanied by bigger price swings, with a 60-day measure of volatility reaching the highest since July.
Record coffee prices are in contrast to broader wholesale food costs, which are well below an all-time high set in early 2022 in the wake of Russia’s invasion of Ukraine. Still, so-called soft commodities account for some of the year’s best-performing raw materials.
Cocoa has soared — hitting a record in April in New York — after poor harvests in West Africa fueled a huge global shortage and rattled the market. Orange juice futures are also near the highest ever after droughts and disease hit trees in top producer Brazil. Output in Florida, the main juice-producing state in the US, has also plummeted, with prices supported by hurricane damage as well.
--With assistance from Ilena Peng, Isis Almeida and Dayanne Sousa.
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