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COFFEE PRICE RALLY TO END ON RISING SURPLUS

By NBF News

The biggest rally in coffee in five years may be ending as the prospect of larger harvests spurs hedge funds to pare bets on higher prices, potentially cutting costs for JM Smucker Company, Kraft Foods Incorporated and Starbucks Corporation, Bloomberg reported from London on Tuesday.

Supplies of arabica, the world's most-grown coffee, will exceed demand by 6.67 million 60-kilogramme (132-pound) bags in the year ending in September 2011, according to ABN Amro Bank NV and VM Group.

That's the most in nine years and more than six times this season's expected surplus. Speculators, including hedge funds cut their net-long position, or bets on higher prices, by 8.4 per cent since August 17, regulatory data show.

The rise in coffee coincided with surging food prices as flooding in Canada and drought across Russia and Europe ruined crops. Wheat as much as doubled since June, contributing to riots over bread costs in Mozambique, and a United Nations price-index of 55 foods advanced to its highest since September 2008 last month.

No such shortages in arabica are forecast, with ABN Amro and VM Group anticipating a 7.4 per cent increase in output to almost 86 million bags, the most since at least the season ended in 2001.

'You cannot justify the spike on the upside if you look at the supply situation,' said Mr. Christoph Eibl, co-founder of Zug, Switzerland-based Tiberius Group, which manages more than $2bn in assets. 'People who have been betting on coffee may lose. In the long run, fundamentals always overrule,' he added.

Arabica rose by as much as 50 per cent since June 7 in New York trading, reaching a 13-year high of $1.9865 a pound on September 8, partly on speculation that rainfall in Colombia, the second- biggest producer after Brazil, would damage crops. Colombian coffee output gained 55 per cent to 615,000 bags in August, the Bogota-based National Federation of Coffee Growers said this month.

Coffee will average $1.52 a pound in the fourth quarter, or 20 per cent less than now, according to the median in a Bloomberg survey of seven analysts. Arabica for December delivery rose by 0.5 per cent to $1.908 in New York.

Speculators accumulated a net-long position of 44,505 contracts by August 17, Commodity Futures Trading Commission data show. That's almost three times the five-year average and equal to 1.67 billion pounds of coffee. They cut that in two of the last three weeks, to 40,757 contracts by September 7.

The last time prices rose this fast, in a rally ending in March 2005, arabica slumped by 38 per cent in the next six months. Futures traded on the ICE Futures US exchange are anticipating a decline next year.

Contracts from March 2011 are in backwardation, meaning that nearby contracts are trading at a premium to longer-dated ones, a sign investors may be more concerned about near-term supply.

Cheaper beans could help cut costs for companies including Northfield, Illinois-based Kraft, which raised US prices twice since May on some types of Maxwell House and Yuban coffee. Starbucks, the world's largest coffee-shop chain, said August 17 that more spending on commodities, mostly coffee, would add about four cents a share to expenses in the year ending in September 2011.