(Bloomberg) -- Too much rain in Brazil is fueling the biggest coffee rally in years just as other markets crumble under the weight of coronavirus fears.
Futures of arabica beans, the mild-tasting variety preferred by Starbucks Corp., have gained 13% since U.S. equities began tumbling in mid-February. That’s the best performance among all major commodities tracked by Bloomberg. Most of that advance has come since Friday, with coffee capping its steepest three-day jump since mid 2016.
As the spread of coronavirus undermines the global growth prospects that determine oil and copper prices, coffee’s fundamentals keep improving.
Much of that has to do with the weather in Brazil. The top-producing nation is having its wettest first quarter in a century in some states. While rain is usually welcome at this time of year when crops are developing, soggier-than-normal conditions are affecting roots, causing leaves and fruit to drop and fungal diseases to spread.
A reduction in global inventories is adding to bullish sentiment. Arabica stockpiles held in port warehouses monitored by the ICE Futures U.S. exchange fell by 2,200 bags on March 2. Inventories held by Brazilian farmers are also low, while producers in Colombia and Honduras practically sold out after locking in prices in a late-2019 rally.
“Arabica coffee in New York has managed to isolate itself from risky assets liquidation,” said Rodrigo Costa, the U.S.-based director at Comexim. “The strength of the market may also be justified by the differential firmness across all producing countries.”
Still, it’s not one-way traffic in terms fundamentals, and price swings have surged. The 60-day volatility reading is the highest since April 2015.
The bearish scenario appeared obvious when prices were falling 21% in January. Brazil’s output appeared poised to approach the record high for the on-year of a biennial cycle, and the slump in the real boosted the appeal of exports priced in the greenback. Even now with rains damping prospects, Brazil is still set to deliver another huge harvest.
On the demand side, the spread of the coronavirus to several countries threatens consumption levels at restaurant and cafes, although Starbucks reopened venues across China after widespread closures. On the other hand, drinkers may increase purchases to prepare at home, which generally adds to waste that goes down the drain.
In terms of chart patterns, futures have topped major moving averages and are flirting with overbought levels. The upside “will remain limited at best” as Brazil’s bumper crops “continues to shadow the market,” the Hightower Report said before Tuesday’s gains.
At the peak of a surge in December, the price reached $1.4245 a pound before slumping back below $1 early last month. On Tuesday, coffee traded at about $1.22 .
©2020 Bloomberg L.P.
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