Coffee prices to fall in 2016 on Brazil boost

Hedge funds are betting your morning cup of coffee is going to get cheaper, even as prices head for a sixth straight monthly loss.

Arabica-coffee futures tumbled in 2015 as ample rains boosted crops in Brazil, the world’s biggest producer and exporter.

That’s lowering costs for Starbucks and other big coffee outlets.

As favourable weather increases crop yields, declining currencies in producing countries are encouraging farmers to export supplies that fetch dollars in return.

It’s all adding up to overwhelming supplies, and the US Department of Agriculture is predicting that output will top use for a sixth straight year.

Brazil’s harvest is poised to keep getting bigger next season, according to Rabobank International.

“Supplies will continue to come at a healthy clip,” said Sameer Samana, a global quantitative strategist at Wells Fargo Investment Institute.

“There’s nothing to suggest starting a new leg up for coffee. Brazilian producers will do anything they can to sell future crops” as the domestic currency retreats, he said.

Arabica prices dropped 28% this year to $1.1915 (€1.0857) a pound on ICE Futures US in New York.

Coffee lovers are already benefiting from this year’s slump.

The average US retail price fell 4.3% to $4.412 a pound in November, the lowest since February 2011, US government data show.

Some prices of roast and ground products by Kraft Heinz, the maker of Maxwell House, were cut earlier this year.

Starbucks expects bean costs to stay “favourable” into 2016, Scott Maw, the chief financial officer, said in late October.

Coffee isn’t the only crop with big supplies. Food prices have fallen 18% in the past year as farmers harvested bumper grain crops worldwide and demand slowed for some meat and dairy products, data from the United Nations Food and Agriculture Organisation show.

In Brazil, where drought ravaged crops in 2014, plentiful rains helped to rescue coffee trees this year.

The country’s next harvest may rise to 58m bags from 48.4m a year earlier, estimates Rabobank. Each bag weighs 60kgs or 132lbs.

Supplies are also climbing elsewhere. Colombia’s production could reach 14m bags in 2015 from 12.1m a year earlier, and may rise to 16m by 2018, the country’s growers’ federation has said.

Honduras — the largest grower in Central America — is set to collect a record harvest.

There are still threats for crops that could help the stem the rout for futures, said Lara Magnusen, a California-based portfolio manager at Altegris Investments.

Prices more than doubled in early 2014 after a lack of rain in Brazil during the first quarter hurt plantings. The El Nino weather pattern is expected to linger into early 2016.

That may bring dry weather to Colombia, reducing bean quality. Even with the supply risks, “the trend is obviously profoundly down” for prices, said Christopher Foster, a portfolio manager at Blackheath Management.