Brazil’s guessing game: The future of the world’s largest coffee producer

Since coffee futures first started trading on the New York market in 1882, the size of Brazil’s harvest has been the key instigator of speculation. It’s no real mystery, considering that in any given crop cycle Brazil accounts for at least a third of world production, and in some years close to 40 per cent of total output. In the last year, many have expressed expectations that Brazil’s 2012-13 harvest could hit a new record. Early signs, however, are showing that this speculation appears to be just that – pure estimation. An evaluation of crop conditions in the pre-flowering period has brought those speculations in line. A dry spell affected vast parts of the growing regions, including the key Southern Minas region from mid-December to mid-February, already cut into the initial forecasts. And as the harvest got underway, this was followed by four cold fronts in June and July. “Brazil has suffered untimely rains and that has delayed the crop tremendously. One more time, the specs and funds have turned their heads towards Brazil. Qualities have been affected and the quality issue is far more serious than what people are willing to accept,” Brazilian coffee trader Marco Ruttimann, a Partner in the Miami-based brokerage Coffee-Link International, tells GCR. “Coffee has been falling of the trees and with the continuing rains some of the fallen coffees in certain areas have been washed away. Many of today’s participants are in denial about the actual impact the Brazilian situation could have on the market.” Ruttimann adds that this will force buyers and roasters to look for replacements elsewhere, which will in turn drive premiums higher. The range for just how much coffee will be available from the new Brazilian harvest remains wide open. The most conservative industry officials are questioning whether Brazil will surpass 50 million 60-kilogram bags. Others remain confident the final crop figure could reach a record of between 55 and 56 million bags. Most seem to agree that the final figure will come down due to massive rainfalls that recently hit the region in June and July. According to Brazilian meteorology group Somar, the two-week period of heavy rain in June alone were 481 per cent above average in the Cerrado region and 414 per cent in the Southern Minas region of Varginha. These reports already had an effect on the market, when Arabica prices launched into a short rally on the initial reports of quality damage. Luiz Carlos Fazuoli, an Agronomist with the Agronomic Institute of Campinas (IAC), says the rainfall was the highest in 30 years, according to registered coffee data. “Obviously this kind of excess water, coinciding with the late maturation and harvesting of the coffee, could lead to an important drop in mostly quality but also production, and it could mean it will be difficult for the harvest to even surpass 50 million bags,” he says. 
The drop in Arabica prices over last year’s 14-year highs has been welcome by roasters, however, these low production figures will likely add an upward pressue to prices. “Brazil coffee has suffered, with up to 20 per cent now classified as poor quality,” says commodity analyst Jack Scoville, Vice President of The Price Group in Chicago. Scoville adds that while it’s still too early to give any figures as to how much coffee has been lost, there is little doubt that the final crop number will have to come down. Echoing the IAC, he says market talk is increasingly centered on the possibility of a crop under 50 million bags.  “There has been some cherry drop as well, although at this point no one knows how much production was actually lost. It will be important to know this as with a crop moving below 50 million bags would support a bullish approach to prices,” says Scoville, adding that the fact alone of “a lot of fermentation in the beans” should keep up pressure on prices. Brazilian crop forecasting agency Conab has put the new harvest at 50.4 million bags, up 16 per cent from the low-cycle harvest in the 2011-12 cycle, which was reported at 43.5 million bags. Conab reported considerable damage to the initial flowering and cherry development because of the prolonged drought from mid-December to mid-February. As such, the latest figure is at the lower end of its initial forecast. At the other end of the scale the US Department of Agriculture has pegged the new crop to reach 55.9 million bags, although this figure was released prior to the onset of the rains. Early trips to watch the harvest process in Southern Minas and Parana showed some evidence of drought damage. Some of the new crop showed more than double the normal volumes of black and hollow beans, up to 10 per cent. Normally these defected beans account for a maximum of 5 per cent. This kind of damage occurs from when the cherries start taking shape until around three months before harvesting, when the crucial bean formation takes place. Too much rain can reduce the size of the beans while too much rain will dry the beans prematurely inside the cherry.
Coffee Trader John Wolthers, from Santos-based exporters Comexim, says that while he hopes the new crop can yield between 55 and 56 million bags, he recognises that this looks increasingly difficult. “It could be that all the rain will impact the volume. I did see a lot of coffee lying on the ground, and a lot of coffee fermenting in the drying fields due to the excessive rain that we experienced,” Wolthers told GCR in early August. Brazil exports should enter their peak period of shipment in the coming months so the market will soon have a clearer idea as to how much coffee will be available from the new harvest. But even if volume expecations are met, more problems could be ahead as the unseasonal rains have provoked a series of erratic flowerings. In producing countries, the saying goes that an early flower is equal to lost crop as the tree won’t be able to flower at the same spot again. Should the flower develop into a new cherry, it won’t be picked, as it will mature outside the harvest season. And any reductions in the next 2013-14 Brazil crop could have much larger consequences in an already tight market. GCR