Cuppa Woe : Brazil Coffee Crop Losses Are Tallied

Brazilian growers are surveying the fields, manufacturers are burning up telephone lines and government officials have been meeting nonstop, all in an effort to minimize the damage of a three-day cold snap that wiped out at least 40% of next year’s coffee crop.

The official numbers aren’t in yet, but preliminary reports are dismal at best. Virtually the entire harvest in Parana, one of three primary coffee-growing states, has been lost. Another 40% was destroyed in Sao Paulo State, and about 25% of the crop was lost in Minas Gerais, the nation’s largest coffee-growing region.

The devastation has pushed raw U.S. coffee prices to their highest levels since 1986, sending retail prices upward. Kraft General Foods told grocery customers it will boost prices about 15% on its Maxwell House brand. A 13-ounce can of Maxwell House will cost $2.74, up 35 cents.

Procter & Gamble said it will raise the price on a 13-ounce can of Folgers instant coffee by 40 cents.

Steve Ruiz, coffee buyer for Los Angeles-based F. Gavina & Sons, said the roaster has already raised prices to its customers, which include wholesalers and supermarkets. “We’re taking it slow. We’re really not sure where it will settle,” Ruiz said.

Coffee roasters who didn’t immediately follow their lead, including giant Nestle, said they were watching the market closely.

“It’s very clear that prices are going higher and that consumers will have to pay more for coffee. But how much more and when is hard to say,” said Mary Townsend, a coffee buyer at Seattle-based Starbucks Coffee Co.

The frost is the second jolt to the coffee market in recent months. In May, raw coffee prices rose due to shortages in Colombia, the world’s No. 2 coffee producer, where disease wiped out much of the crop.

For Brazil, the world’s largest coffee producer, it is the biggest crop loss in 19 years, and it could get worse. Luis Cavalcante, chief meteorologist for the national weather service, said a second cold front is expected to send temperatures plummeting below zero early next week in the already-ravaged areas.

Members of the National Coffee Council, an organization of 68 of the biggest coffee-growing collectives, were scheduled to meet in Sao Paulo today to piece together a strategy to deal with their losses.

Much will depend on the government’s willingness and ability to release the 17 million bags of coffee it has on reserve in 46 warehouses in three southern states.

National manufacturers want to use much of the reserve to keep the nation’s consumer prices relatively low.

“We don’t want the prices to shoot up to the roof,” said Luis Roberto Gonsolvaes, export manager for Cafe do Ponto, Brazil’s second-largest coffee manufacturer. “It will depend on if the government uses the reserves.”

In monthly auctions, the government has been selling part of its reserves in 132-pound bags to manufacturers at below-market prices. This month, the government nearly doubled the amount available for sale by adding 200,000 bags to the load. But the government is limited by congressional mandate to sell only 2.8 million bags this year, far below what will be needed to stave off high prices.

Meanwhile, exporters want part of the reserves so they can take advantage of the world market’s higher coffee prices. Even if the government releases all of its exportable coffee, however, the effect will be minimal, says Francisco Orique of Flavour Coffee, a trading company. Only 3 million of the bags the government currently holds in reserve are of exportable quality.

“Brazil normally produces about 31 million bags of coffee,” he said. “We have lost between 6 and 10 million bags. There’s going to be a huge deficit.”

The freeze couldn’t have come at a worse time for Brazil. After a four-year price slump that began in 1989 with the collapse of the International Coffee Agreement, coffee prices had begun to soar this year due to lower worldwide harvests.

As recently as last July, the average world price of a pound of green (unroasted) beans stood at 52 cents. By last month, it had jumped to $1.28 a pound. Brazil was poised for an estimated $3.5 billion on next year’s sales after years of averaging about $1.5 billion in coffee exports.

“But now, even though coffee prices are high, we will come to the market with less to sell,” said Hercilio Amaral, general secretary of the National Coffee Council. The result, he said, is that Brazil could miss out on as much as $1 billion in exports.

The question now is how the world’s eighth-largest economy--in particular the 7.5 million workers who depend on coffee production and export for their livelihood--will be affected.

If the government can work out a process for releasing the reserves, manufacturers say, plants will keep running and workers will keep their jobs.

For those in the field, the cold snap could actually provide a small jump in employment. While growers won’t be able to harvest the more than 20 million plants damaged or destroyed by the frost, they will need even more workers to plant new crops and trim the plants that were damaged.

For Brazilians, who consume a third of the coffee the country produces, the freeze is--at least symbolically--a particularly sour note just days before the country is to embark on an economic program to halt spiraling inflation.

The real, a new currency that will be pegged to the dollar, is to be introduced Friday in the hope that it will dramatically lower inflation, which last month was nearly 50%.

The freeze is “another thing that will have a negative impact on the country,” said Denise Cardosa Da Silva, an unemployed schoolteacher.

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Staff writer Denise Gellene in Los Angeles contributed to this report.

Coffee Rush

A three-day cold snap in Brazil has caused prices for coffee futures to soar. Daily closes in New York, in price per pound: May 2: 90 cents Wednesday: $1.89

Source: Bloomberg Business News