Commodities Corner
SATURDAY, AUGUST 24, 2013
Double Trouble in Brazil
By LESLIE JOSEPHS
A weak currency and poor fundamentals hammer prices of sugar and coffee.
Arabica coffee and sugar prices have dropped to multiyear lows, a result of tepid demand growth and robust supplies. Now a tumbling currency in Brazil is creating a triple threat to both commodities.
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Brazil is the biggest producer of both sugar and coffee, accounting for one-fifth and one-third of the world's supplies, respectively. But lackluster economic growth and double-digit inflation have driven the real to its lowest point against the U.S. dollar in more than four years. On Friday, it was trading at about 2.38 per greenback. "I think the currency has weakened much faster than anyone had anticipated," says Michael Cordonnier, an agronomist and president of Soybean and Corn Advisor, a Hinsdale, Ill., agricultural consulting firm.
The weaker real means that exporters receive more of them when they sell the commodities abroad in U.S. dollars. This encourages them to send their products onto the world market even as prices sag, adding to swelling supplies. "Most important is not the price, but how much you're going to make," notes Alex Oliveira, an analyst at the Brazil desk of New York–based brokerage Newedge.
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The real has depreciated more than 5% over the past two months and 15% this year, as forecasts—including the government's—for the country's economic growth this year have dimmed. A weaker currency can add to Brazil's woes, making imports more expensive and driving up already-high inflation.
THE BRAZILIAN CENTRAL BANK is trying to prop up the currency by auctioning swap contracts and dollar credit lines. These efforts have helped the real make some gains, but the underlying problems remain. "It looks like it's on its way to 2.60" against the dollar, predicts Sterling Smith, a futures specialist at Citigroup. "There's not a lot of reason to come in here and buy this currency."
The Brazilian government is also trying to shore up coffee prices, offering to buy as many as five million 60-kilogram (about 132-pound) bags of arabica beans from producers, a measure used for the first time in four years. Arabica coffee, prized for its mild taste, is used in gourmet blends.
The measures, announced in early August, gave the market a boost, but the buzz soon wore off. Futures of arabica beans on the ICE Futures U.S. exchange fell to a four-week low last week, ending on Friday at $1.1705 a pound.
The Brazilian government hasn't intervened in a similar way in the sugar market, because sugar mills have another tool at their disposal in times of low prices: increased ethanol production. Since April, when the sugar-harvest season began, through July, the mills used 57.1% of the 268.8 million tons of cane harvested from the main growing region to make ethanol, and the rest to make sugar, according to the Brazilian Sugarcane Industry Association, a trade group. That's up from the 51.9% they dedicated to ethanol, which is used as a vehicle fuel, at the corresponding point in the harvest last year. Raw-sugar futures settled on Friday at 16.47 cents a pound, down 2.8% on the week.
In the near term, the weak real and poor supply-and-demand fundamentals are likely to keep coffee and sugar prices moving lower; Smith warns they face "a much bigger problem than a simple head wind." However, in the longer term, hope is in sight for coffee. The government's purchases could absorb up to about 10% of the country's projected output this season, and demand usually heats up in the Northern Hemisphere's autumn months.
LESLIE JOSEPHS covers coffee, sugar, and other commodities for The Wall Street Journal.
The weaker real means that exporters receive more of them when they sell the commodities abroad in U.S. dollars. This encourages them to send their products onto the world market even as prices sag, adding to swelling supplies. "Most important is not the price, but how much you're going to make," notes Alex Oliveira, an analyst at the Brazil desk of New York–based brokerage Newedge.
The real has depreciated more than 5% over the past two months and 15% this year, as forecasts—including the government's—for the country's economic growth this year have dimmed. A weaker currency can add to Brazil's woes, making imports more expensive and driving up already-high inflation.
THE BRAZILIAN CENTRAL BANK is trying to prop up the currency by auctioning swap contracts and dollar credit lines. These efforts have helped the real make some gains, but the underlying problems remain. "It looks like it's on its way to 2.60" against the dollar, predicts Sterling Smith, a futures specialist at Citigroup. "There's not a lot of reason to come in here and buy this currency."
The Brazilian government is also trying to shore up coffee prices, offering to buy as many as five million 60-kilogram (about 132-pound) bags of arabica beans from producers, a measure used for the first time in four years. Arabica coffee, prized for its mild taste, is used in gourmet blends.
The measures, announced in early August, gave the market a boost, but the buzz soon wore off. Futures of arabica beans on the ICE Futures U.S. exchange fell to a four-week low last week, ending on Friday at $1.1705 a pound.
The Brazilian government hasn't intervened in a similar way in the sugar market, because sugar mills have another tool at their disposal in times of low prices: increased ethanol production. Since April, when the sugar-harvest season began, through July, the mills used 57.1% of the 268.8 million tons of cane harvested from the main growing region to make ethanol, and the rest to make sugar, according to the Brazilian Sugarcane Industry Association, a trade group. That's up from the 51.9% they dedicated to ethanol, which is used as a vehicle fuel, at the corresponding point in the harvest last year. Raw-sugar futures settled on Friday at 16.47 cents a pound, down 2.8% on the week.
In the near term, the weak real and poor supply-and-demand fundamentals are likely to keep coffee and sugar prices moving lower; Smith warns they face "a much bigger problem than a simple head wind." However, in the longer term, hope is in sight for coffee. The government's purchases could absorb up to about 10% of the country's projected output this season, and demand usually heats up in the Northern Hemisphere's autumn months.
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