Funds Back Down From Coffee Bearish Bets on Crop Weather Threat

(Bloomberg) — Too much rain in Colombia, and too little in
Brazil. South American coffee crops are suffering from a
confluence of extremes, signaling tighter supplies than

The adverse weather is shaking the confidence of hedge
funds, who less than a month ago held a record wager that
arabica coffee futures would fall. Instead, prices have posted
two straight weekly gains, reaching a two-month high on Nov. 30.
The unexpected rebound has forced money managers to back away
from their negative bets.

“Given the current fundamentals, the move in arabica is
warranted,” said Ben Ross, a New York-based co-portfolio manager
of commodity strategy at Cohen & Steers Capital Management,
which oversees $61.6 billion. Traders had “gotten too complacent
because everybody was expecting the so-called monster crop in
Brazil, and many are disregarding we haven`t had perfect
weather. Demand has also been decent, especially in emerging
markets. People fell in love with the bear market story, and
there are cracks in that bear case.”

In the week ended Nov. 28, money managers reduced their
net-short positions, or the difference between bets on a price
increase and wagers on a decline, to 40,766 futures and options,
according to U.S. Commodity Futures Trading Commission data
released three days later. That compares with 47,229 a week
Here`s what traders will be watching:

South American Crops

This year`s output will trail forecasts in Colombia, the
top arabica producer behind Brazil, after the excessive rains
hurt flowering, and it`s unclear how much the deluge will affect
the 2018 harvest, according to Roberto Velez, the chief
executive officer at the country`s National Federation of Coffee

Brazil`s 2017-2018 crop came in lower than expected after
dry weather damaged plants, according to Ecom Trading, the
world`s second-largest coffee trader. At the same time, an
abnormal outbreak of insects spread the coffee-cherry borer
disease, reducing bean size and yields, a production drag that
may have ramifications into next year`s crop.


Brazilian production has been sub-par for the past three
years as crops struggled to recover from a devastating drought
in 2014. With demand robust, global inventories have been
shrinking and are forecast to reach the lowest since 2011,
according to data from the U.S. Department of Agriculture. That
leaves less cushion if South American crops continue to face
weather problems.

Emerging Deficit

The crop concerns threaten to widen a global production
shortfall. London-based Sucden Financial Ltd. projects world
2017-2018 output to drop 1.3 percent from a year earlier to
154.4 million bags, while demand is poised to rise 1.3 percent
to 158 million bags. A bag weighs 60 kilograms (132 pounds).
Rabobank International expects a world deficit of 4.7 million

Central America

There`s still time for Brazil`s crops to recover if rains
return in coming months. Bountiful harvests for producers in
Central America, led by Honduras, can also help make up for
South American declines. Ample inventories in importing nations
are also still weighing on prices, said Hernando de la Roche, a
senior vice president for INTL FCStone in Miami. Futures in New
York fell 5.5 percent this year through Friday.
“The market will wait for further clarity about the crop,”
De la Roche said. “Rains will be very important in January and

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