Breakfast blues
Commodities - SEPTEMBER 29, 2016

Breakfast blues

by Jody Barhanovich

Coffee and orange juice drinkers, beware! Irrational weather in Brazil is creating a rise in the price of ingredients that are in your favorite breakfast drinks.

Dry weather is hurting production of arabica and robusta beans, while excessive rain in citrus areas has obstructed production of orange juice and frost in sugar-growing regions has cut yields. Brazil’s weather problems are coming after an El Nino spurred drought across Asia earlier this year.

Brazil is the world’s largest producer and exporter of all three products, emphasizing why investors are positioning for higher prices due to supply issues. A combined measure for holdings in the three products is at an all-time high. Investors’ holdings of arabica coffee increased to the highest they have been since October 2014, while holdings of orange juice rose for a fourth straight week.

Sugar and orange-juice futures in New York are already trading near four-year highs. Arabica coffee, the variety favored by Starbucks, recently reached its highest cost since February 2015.

The U.S. Department of Agriculture’s July 2016 research report Citrus: World Markets and Trade forecasts Brazil’s orange production to drop to 14.4 million, 2.4 million lower than the previous year, due to higher-than-normal temperatures during September and October that will significantly damage fruit production. Exports are expected to decrease sharply as well.

Overall, global orange juice production for 2015-2016 is forecast to decrease to 1.6 million tons, according to the USDA. Consumption, although down, is forecast to exceed production for the second consecutive year leading to sharply lower stocks. Orange juice futures surged to the highest level in more than four years in early July 2016 amid signs of tighter supplies.

Experts warn that increased prices are going to hurt demand for sugar, coffee and orange juice in the near term, creating an uncertain future.

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