Coffee prices surge as unusual cold threatens Brazilian production

By Nigel Hunt and Marcelo Teixeira

LONDON/NEW YORK, July 26 (Reuters) - Arabica coffee prices rose 10% more on Monday, after jumping nearly 20% last week, to their highest in nearly seven years as unusual cold weather threatens coffee crops in the world's largest producer Brazil.

Severe frosts last week damaged a large part of fields in the main Brazilian coffee belt and a new polar air mass is forecast to move over the same areas later this week, which will be the third strong cold front to hit crops this year.

Coffee trees are extremely sensitive to frost, which can cause severe damage and even kill trees completely. If a farm needs to replant trees, production would take around three years.

Preliminary estimates from the Brazilian government's food supply agency Conab said that last week's frosts had affected 150,000 to 200,000 hectares - about 11% of the country's total arabica crop area.

"This marks the first time since 1994 that the country has experienced such a weather event," coffee trader I & M Smith said in a market update, referring to the July 20 harsh frosts.

Arabica coffee futures prices on ICE rose sharply on Monday, with the September contract climbing to a peak of $2.1520 per lb, the highest for the front month since October 2014.

"The extent of the damage is still unclear, however estimates are now between 5.5 million and 9 million (60 kg) bags, up from 2 million to 3 million last week," said Charles Sargeant, softs and agricultural commodity broker at Britannia Global Markets.

Sargeant was referring to the 2022 Brazilian crop. This year's smaller production has been mostly harvested. A good production next year in Brazil was seen as important in balancing the global supply.

Arabica coffee futures have risen by about 35% since the end of June, raising the prospect that major brands may have to raise prices in the coming weeks.

"Over the last 12 months we have seen a sharp rise in ingredient, freight and other costs, which will require us to take appropriate measures," JDE Peet's, one of the world's largest coffee companies, said in a statement.

"Historically, significant fluctuations in green coffee prices have been reflected in the market and we expect that precedent to continue."

Starbucks (SBUX) and Nestle, which are also among the largest coffee processors and retailers in the world, declined requests for comments regarding possible impacts to the industry and the prospect of reduced availability next season.

Smaller players would certainly suffer, while consumers will have to pay more.

"We have stocks only up to September. We raised prices already three times this year, following the market moves, but the situation remains difficult," said Luciane Carneiro Mendes, a partner at Cafe Carneiro, a small roaster in Brazil.

Coffee prices in Brazil, she said, have risen from 400 reais ($77.30) per 60-kg bag in December to around 800 reais this month, but there are estimates for further increases ahead to around 1.000 reais. (Reporting by Nigel Hunt in London and Marcelo Teixeira in New York Editing by David Goodman, Grant McCool and David Evans)

Copyright © Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

News, commentary and research reports are from third-party sources unaffiliated with Fidelity. Fidelity does not endorse or adopt their content. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from their use.