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Coffee Rises on Brazil Drought Fear

October 13, 1999

Alarm that a Brazilian drought may have already harmed next year’s coffee crop sent coffee futures skyrocketing 24 percent Wednesday on New York’s Coffee, Sugar & Cocoa Exchange.

In other markets, crude oil rose more than 3 percent after a report showed a dramatic decrease in stockpiles, and lumber futures soared.

Coffee trading saw a record volume in New York as futures buyers drove up the market wildly. They were responding to weather forecasts that showed no significant rain in sight for key growing regions of Brazil.

After hitting a bottom of 80 cents a pound on Oct. 1, when a bumper crop of 40 million 60-kilogram bags was expected, coffee has soared to its highest price level in four months.

Coffee for December delivery rose 22.80 cents during Wednesday’s frantic session, closing at $1.1935 a pound. It’s up 40 percent for the week as more and more speculative firms that had sold coffee futures short _ a bet prices will fall _ were forced to buy futures to cancel out their previous sales.

In short selling, traders borrow a commodity and sell it, hoping to buy it back later at a lower price, repay the loan and pocket the difference. If the price rises instead, the trader must quickly buy the commodity to minimize losses.

``It was a helluva day,″ said Jack Scoville, an analyst in Chicago for the Price Futures Group. ``There’s definitely going to be some damage in Brazil.″

The latest prognosis for the 2000-2001 crop is 30 million bags _ down by a quarter _ because the lack of precipitation comes at a critical time, when coffee trees should be flowering and moisture is needed in order for the beans to grow.

``That amount of loss (10 million bags) is equal roughly to the entire export production of Colombia,″ Scoville said. ``Is all that coffee lost? Maybe not, if rains start soon. Nobody can know until we get to the end of the year, to the harvest.″

The Brazilian drought also has driven up prices for soybeans, sugar and orange juice, to a lesser extent.

Coffee drinkers won’t necessarily see higher prices for coffee or beans _ not yet. Scoville says if the dry spell ends soon, it won’t have much long-term effect at all, but if prices remain this high or go higher coffee consumers would likely feel the effects within three months.

Crude extended its rally to a third straight day on the heels of last week’s 16 percent price plunge.

Driving the market Wednesday were American Petroleum Institute data, released late the previous day, showing that U.S. crude supplies fell 2.3 percent last week to 298.9 million barrels _ their lowest level in 25 months. Also, traders were watching the development of tropical storm Irene in the Caribbean.

West Texas intermediate crude oil for November delivery rose 76 cents to $23.06 a barrel; November heating oil rose 1.71 cents to 59.61 cents a gallon; November unleaded gasoline rose 0.70 cent to 63.70 cents a gallon; November natural gas rose 4.3 cents to $2.97 per million British thermal units.

North Sea Brent crude oil for November delivery rose 17 cents to $22.22 a barrel on London’s International Petroleum Exchange.

On the Chicago Mercantile Exchange, November lumber futures rose the daily trading limit of $10 to close at $296.10 per 1,000 board feet.

Some analysts said technical reasons were behind the buying spree.

Others cited President Clinton’s announcement of the preservation of 40 million acres of federally owned forest in 35 states as protected areas, although its effect on the industry wasn’t clear.

Much of the U.S. timber industry works off privately held lands.

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