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Brazilian coffee uncertainty pushes up prices

The price of coffee has risen sharply as concerns about the effects of drought in Brazil grow and the global demand for green coffee increases.

A number of factors have contributed towards fluctuating coffee markets in Brazil – many of which look set to continue – and the situation is likely to change rapidly as the country is the world's biggest coffee bean producer.

Brazilian weather concerns push up coffee prices

Uncertainty regarding the national coffee crop is ongoing, according to the International Coffee Organization (ICO), with Brazil currently in the midst of its most severe drought in decades.

In its monthly Coffee Market Report for March 2014, the trade association explained that weather events in Brazil have affected yields.

The 2014-15 crop is starting this month, so it is currently unclear how much impact the current drought in Brazil will have on coffee over the coming months and years.

Recent weather reports have warned that dry conditions are expected to continue and the ICO stated: "It is difficult to estimate the extent of the damage from the drought and high heat until the crop is being harvested, although a recent study has referred to it as the largest climate anomaly since the 'Black Frost' of 1975."

The organisation added that the outlook for the 2015-16 crop could be "even worse" as a result of the drought and high temperatures.

Last month saw some scattered rainfall in coffee growing areas of Brazil, which helped to curb some of the price increases seen in the last two months, but the ICO reported "prices remain highly unstable".

Brazilian uncertainty affects global prices

The organisation stated there was a 20 per cent jump in average coffee prices during March 2014 – up to 165.03 US cents – compared with February, taking the monthly measure to its highest point in two years.

During both February and March this year, monthly volatility of the ICO composite indicator price exceeded ten per cent, ranging from a high of 177.29 US cents to 153.3 US cents within a ten-day period.

"International prices remain unsteady and sensitive to weather events in Brazil," the body stated, warning that crops could be affected for a number of years.

The highest rises in coffee prices during March were within the three Arabica groups of Colombian Milds, Other Milds and Brazilian Naturals, each of which witnessed climbs in excess of 20 per cent from February.

Growing global demand pushes up Brazilian coffee prices

As Brazilian coffee continues to prove popular, global coffee consumption is rising and demand could outstrip supply if Brazil's output falls.

The ICO estimated total global coffee demand for 2013 at 145.8 million bags – up by 2.7 per cent year-on-year and slightly ahead of the provisional figure of 145.7 million bags published for 2013-14.

"It seems likely that the market is heading towards a supply deficit," the organisation declared, adding that the size of the 2014-15 Brazilian crop is the most important variable at present.

Rising consumption is being driven by traditional markets, in particular the US, while exporting nations are also reporting strong growth in coffee drinking.

However, additional factors such as leaf rust in Central America and heavy rain in Indonesia could also affect supplies this year.

Brazilian coffee industry insists it can meet demand

Despite the weather threatening crops, the Brazilian coffee industry association Abic insisted the nation has sufficient stocks to meet both domestic and export demand.

According to the body, surplus supplies could be used. However, the industry has warned that initial estimates for this year's crop of production of 40.1 to 43.3 million bags may have to be reduced, as a result of damage caused by the weather.

Abic executive director Nathan Herszkowicz said the extent of the damage to crops from drought and soaring temperatures is still not known.

Many Brazilian farmers who have previously stockpiled supplies due to high levels of supply around the world are now selling stocks as global prices increase.

The country's government is also planning to release some of its state-controlled stockpiles to alleviate pressure on markets.

A surplus of nearly five million bags is estimated to exist worldwide, some of which could be used this year to meet demand for coffee.