Price Premium for High-End Coffee Reaches Highest Since 2016

The premium for high-end coffee over cheaper beans surged to the highest since 2016, driven by concern that dry conditions could worsen the outlook for the drought-stricken crop in Brazil.

Futures for arabica coffee, the type used at cafes such as Starbucks Corp. and Peet’s Coffee & Tea Inc., rose Friday to the highest since late February, posting a third straight weekly gain. The spread or premium that arabica commands over the robusta variety, widely used to make instant-coffee beverages, climbed to 74.27 cents a pound, the highest since November 2016.

A drought that destroyed about one third of arabica production in Brazil, the top producer and exporter, will spur the largest global shortfall in years. Producers, who start harvesting next month, have sold out of almost all of their prior crop. Nestle SA reported strong sales this week, turbocharged by the Swiss food giant’s Nespresso brand coffee.

Limited rains in the next 10 days will stress cherry growth in the southern tier of Brazil’s main coffee belt, according to meteorologists at Maxar Technologies Inc.

Price Premium for High-End Coffee Reaches Highest Since 2016

Arabica coffee for July delivery rose 1.7% to $1.385 a pound in New York, after touching $1.402, the highest for a most active contract since Feb. 25.

The rally may be slowed by ebbing demand in the coming months amid persistent pandemic jitters over consumption and the typical in the Northern Hemisphere slowdown during the summer, said Christian Wolthers, the president of Wolthers Douque, an importer in Florida. Futures may trade between $1.20 and $1.40 in the near term, until clear evidence emerges about yields in Brazil, where robusta crops were not hurt by the lack of moisture, he said.

In other softs markets, cotton futures rose 3.2% to 88.80 cents a pound, rising for a third straight week. The fiber is still drawing support from poor conditions for plantings in the U.S., the biggest exporter -- notably in the key region of West Texas.

“Competing crops, the U.S. dollar and inflation expectations are all playing a role in this as well and at this point they are still acting in support of higher cotton prices,” Peter Egli, the Chicago-based director for Plexus Cotton Ltd. “However, the seemingly never-ending pandemic has us a bit nervous and we need to be prepared for mood swings in the financial markets in case the situation worsens.”

More broadly, commodity-price indexes have risen this week, with grain prices soaring and a weaker dollar, which makes greenback-priced raw materials cheaper for investors holding other currencies.

©2021 Bloomberg L.P.

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