Brazil on brink of a coffee boom

As Brazilian farmer Francisco Cesar Di Giacomo surveys his fields, he plucks a pod off a nearby coffee tree and splits it open with a penknife. He points to the thin husk: a sign that the beans inside will be plump and robust.

Here in southern Minas Gerais, the mountainous state at the heart of the nation’s coffee belt, there’s growing evidence that the looming crop will be enormous.

Di Giacomo, who runs two arabica farms with a combined area topping 20 acres in Sao Goncalo do Sapucai municipality, expects a harvest of 3,200 bags, each weighing 132 pounds. That would be a third more than last year. What’s more, he’s planted new trees recently and expects a crop of 5,000 bags in 2019.

The outlook for a big harvest was shared by farmers and traders during a field survey that spanned four days and more than 3,100 miles across the region. After years of higher domestic prices, well-funded farmers have invested generously in their plantations. Beneficial rains during the country’s summer aided bean development and trees are looking green and lush.

Brazil is the world’s biggest grower and exporter of the highly-prized arabica beans. Growers in Minas Gerais are optimistic for the 2018 season, as most trees enter what’s typically the higher-yielding half of a biennial crop cycle. The government’s crop-forecasting agency Conab has said the nation’s total coffee production, which also includes the robusta variety, could rise as much as 30 percent to a record.

The supply outlook underscores why coffee is one of the worst performers in the Bloomberg Commodity Index over the past year. Arabica prices have slumped 15 percent in the last 12 months to $1.206 a pound on ICE Futures U.S. in New York.

Hedge funds are wagering on more declines. In the week ended Feb. 27, money managers had a net-short position of 56,520 futures and options, according to U.S. Commodity Futures Trading Commission data published March 2. The figure, which measures the difference between bets on a price decline and wagers on a rise, has expanded 41 percent since mid-January. The funds were last net-bullish in August.