Hedge funds are helping push up the price of that other major fuel – coffee – to fresh highs.
That could soon mean another price hike at your local coffee shop, as the cost of beans hit a 12-year peak.
Hedge funds aren’t the only reason for the run up. Wet weather and aging infrastructure in Colombia, one of the world’s most robust growing regions, is expected to reduce supply at a time when global stockpiles are already at their lowest level in years.
Those factors, coupled with a weaker U.S. dollar, stimulated the surge in coffee futures on the market Thursday.
New York’s September Arabica contract rose 5.65 cents (U.S.), or 3.4 per cent, to settle at $1.7305 per pound, the highest settlement on the spot basis chart since February, 1998.
Also Thursday, coffee reached $1.746, the highest intraday price since June 24. On that date, the commodity climbed to a 12-year high of $1.765.
Coffee’s one-day jolt, alongside increases in other commodities, was significant, due in part to its smaller market size when compared to wheat, corn or crude.
“Coffee is a sensitive market when funds come in,” said Sterling Smith, an analyst for brokers Country Hedging Inc. in Minnesota. “A little bit of fund activity can go a long way to push this market higher.”
Coffee prices have risen by about 28 per cent over the past two months, ever since production issues started to surface in Central America, the world’s largest coffee-growing region.
Brazil produces about one-third of the world’s coffee, followed by Vietnam at about 10 per cent and Colombia at 9 per cent.
Coffee prices were already set to rise this year after exceptionally bad harvest last year in both Colombia and Brazil due to wet weather.
“There has been relative scarcity of Colombian beans and relative scarcity of mild coffee worldwide,” Luis Genaro, chief executive officer of Colombia’s National Federation of Coffee Growers, told Bloomberg recently.
Colombian production shrank to 4.04 million bags in the first six months of the year, from 4.24 million bags a year earlier. A bag weighs 60 kilograms (132 pounds).
Coffee prices are expected to keep climbing as the harvest conditions deteriorate, said Country Hedging’s Mr. Smith, who forecasts prices to hit $2 a pound by the end of the year.
Still, demand for coffee isn’t expected to fall as a result of rising prices, which are likely to be passed on to consumers in the near future.
“The price of coffee has to go up an awful lot before people quit buying it,” Mr. Smith said.
Arabica prices in Brazil, the world’s biggest producer, will stay near a five-year high as rising demand outpaces supply, according to Cepea, a research group at the University of Sao Paulo.
With files from Bloomberg News
