NEW YORK (Dow Jones)--Coffee prices skyrocketed to 12-year highs Thursday on the scarcity of high-quality beans in a market where overall supplies are grinding lower.
Coffee for July delivery, the nearby contract, settled 8.15 cents, or 5%, higher at $1.6675 a pound on ICE Futures U.S. Coffee futures last traded at these levels in February 1998.
Buying by speculators, such as banks and hedge funds, has provoked a 25% spike in coffee prices since June 7. The market rallied to two-year highs late last week. Thursday's move marks a resumption of the upward momentum that has attracted interest from investors looking to capitalize on poor harvests in Colombia and Central America. These regions are known for their arabica beans, which are highly sought for their taste in brewed coffee. The next harvest from these regions won't come until the fall.
The realization that prices haven't, or can't, elicit additional supplies is exacerbating the surge.
"The rally we saw really hasn't produced the coffee that the market seems to want at the minute," said Jack Scoville, vice president at Price Futures Group in Chicago. "There's a shortage that's now being legitimately expressed."
Sales of beans sold directly from coffee growers, who are referred to as "origin" sellers in market parlance, were expected to pressure prices with the onset of the harvest in Brazil, the world's top coffee producer. Harvest of arabica beans began in June, but got off to a late start and isn't yet in full swing.
A Central American broker said origin beans are available, but the volatile futures market is making commercial buyers skittish.
Roasters and merchants contract with "origins" such as farmer cooperatives to receive coffee at a later date. Buyers often take a short position in the futures market, which would offset some of their costs if coffee prices were to then fall.
Origin sellers may want to fix prices to sell the crop, but the risks to commercial traders of getting involved in such a volatile environment outweigh the benefit, said the broker, who spoke on the condition of anonymity because he wasn't authorized to speak with the press.
This shortage of participants willing to take short positions means prices may need to go higher before a solid ceiling emerges.
Aside from the risk of losing money in the volatile market, higher margin requirements are pushing some to the sidelines and adding to the volatility.
ICE on Thursday raised its initial margin requirement for coffee hedging by $150 to $3,150 per 37,500-pound contract. Others suggest the magnitude of fund buying is simply overpowering pressure from commercial sales.
A concurrent rally on robusta coffee futures traded on Euronext's NYSE Liffe exchange in London added fuel to the fire. July robusta futures there recently ended $71, or 4.6%, higher at $1,622 a ton. The market rallied 7% at its peak during Thursday's session.
ICE arabica prices eased from intraday highs as traders took profits. That selling could intensify, particularly ahead of the weekend and the July 4 holiday in the U.S., said Sterling Smith, a market analyst at Country Hedging in St. Paul, Minn.
Analysts warn that any indication of a pullback in prices could spark a massive selloff, while a move higher will fuel more buying.
"When coffee begins to make a move like this, we need to be wary," said Smith.
ICE coffee warehouse stocks decreased by 1,435 60-kilogram bags Thursday to total 2.5 million bags, according to exchange data.
ICE coffee open interest--the number of active positions left at the end of the session--increased by 1,554 lots Wednesday to total 163,140 lots, according to exchange data.
Volume was estimated at 29,430 lots, according to exchange data. In options, approximately 15,581 calls and 12,295 put options traded.
ICE Change Range
Jly $1.6675 +8.15c $1.6015-$1.7500
Sep $1.6875 +8.25c $1.6050-$1.7650
-By Holly Henschen, Dow Jones Newswires; 212-416-2138;
holly.henschen@dowjones.com
(END) Dow Jones Newswires
Coffee for July delivery, the nearby contract, settled 8.15 cents, or 5%, higher at $1.6675 a pound on ICE Futures U.S. Coffee futures last traded at these levels in February 1998.
Buying by speculators, such as banks and hedge funds, has provoked a 25% spike in coffee prices since June 7. The market rallied to two-year highs late last week. Thursday's move marks a resumption of the upward momentum that has attracted interest from investors looking to capitalize on poor harvests in Colombia and Central America. These regions are known for their arabica beans, which are highly sought for their taste in brewed coffee. The next harvest from these regions won't come until the fall.
The realization that prices haven't, or can't, elicit additional supplies is exacerbating the surge.
"The rally we saw really hasn't produced the coffee that the market seems to want at the minute," said Jack Scoville, vice president at Price Futures Group in Chicago. "There's a shortage that's now being legitimately expressed."
Sales of beans sold directly from coffee growers, who are referred to as "origin" sellers in market parlance, were expected to pressure prices with the onset of the harvest in Brazil, the world's top coffee producer. Harvest of arabica beans began in June, but got off to a late start and isn't yet in full swing.
A Central American broker said origin beans are available, but the volatile futures market is making commercial buyers skittish.
Roasters and merchants contract with "origins" such as farmer cooperatives to receive coffee at a later date. Buyers often take a short position in the futures market, which would offset some of their costs if coffee prices were to then fall.
Origin sellers may want to fix prices to sell the crop, but the risks to commercial traders of getting involved in such a volatile environment outweigh the benefit, said the broker, who spoke on the condition of anonymity because he wasn't authorized to speak with the press.
This shortage of participants willing to take short positions means prices may need to go higher before a solid ceiling emerges.
Aside from the risk of losing money in the volatile market, higher margin requirements are pushing some to the sidelines and adding to the volatility.
ICE on Thursday raised its initial margin requirement for coffee hedging by $150 to $3,150 per 37,500-pound contract. Others suggest the magnitude of fund buying is simply overpowering pressure from commercial sales.
A concurrent rally on robusta coffee futures traded on Euronext's NYSE Liffe exchange in London added fuel to the fire. July robusta futures there recently ended $71, or 4.6%, higher at $1,622 a ton. The market rallied 7% at its peak during Thursday's session.
ICE arabica prices eased from intraday highs as traders took profits. That selling could intensify, particularly ahead of the weekend and the July 4 holiday in the U.S., said Sterling Smith, a market analyst at Country Hedging in St. Paul, Minn.
Analysts warn that any indication of a pullback in prices could spark a massive selloff, while a move higher will fuel more buying.
"When coffee begins to make a move like this, we need to be wary," said Smith.
ICE coffee warehouse stocks decreased by 1,435 60-kilogram bags Thursday to total 2.5 million bags, according to exchange data.
ICE coffee open interest--the number of active positions left at the end of the session--increased by 1,554 lots Wednesday to total 163,140 lots, according to exchange data.
Volume was estimated at 29,430 lots, according to exchange data. In options, approximately 15,581 calls and 12,295 put options traded.
ICE Change Range
Jly $1.6675 +8.15c $1.6015-$1.7500
Sep $1.6875 +8.25c $1.6050-$1.7650
-By Holly Henschen, Dow Jones Newswires; 212-416-2138;
holly.henschen@dowjones.com
(END) Dow Jones Newswires
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