March 28th, 2012

Coffee futures may gain if the weather in Brazil, the world’s largest producer, remains dry “in coming months,” Goldman Sachs Group Inc. (GS) said.

The commodity has fallen 18 percent so far this year in New York as traders sold the beans in anticipation of a large Brazilian crop. Growers in the South American country may harvest a record 49 million to 52.3 million bags in the 2012-13 season starting in July as trees enter the higher-yielding half of a two-year cycle, exceeding the high of 48.5 million bags in 2002, the government estimates. A bag of coffee weighs 60 kilograms (132 pounds).

“Should recent dry weather conditions in Brazil extend in coming months, we would expect higher prices on lower local production,” Damien Courvalin, an analyst at the bank in New York, wrote in a report e-mailed today.

The main coffee growing areas in Brazil were “drier than usual” in February, German researcher F.O. Licht GmbH said in a report dated March 19. Low levels of soil moisture have resulted in many beans being below average weight, according to Marco Antonio dos Santos, an agronomist at Sao Paulo-based forecaster Somar Meteorologia.

“Near-record short net speculative positioning, as reported by the CFTC Commitment of Trader reports, could further exacerbate the magnitude of a price rally on lower production estimates,” Goldman’s Courvalin said.
Speculative Positions

Hedge fund managers and other large speculators were net- short, or betting on lower prices, in arabica coffee by 11,161 futures and options as of March 20, according to U.S. Commodity Futures Trading Commission data. That’s the biggest net-short position since 2009, the data show.

The frost season in Brazil, which starts about June, may be a catalyst for funds to reverse their net-short positions, helping the market to retrace some losses, Keith Flury, an analyst at Rabobank International in London, wrote in a monthly report e-mailed yesterday.

Dryness in the South American country also poses an “upside risk” to Goldman Sachs’ three-month to 12-month sugar price forecasts of 22 cents a pound, according to the report.

- Isis Almeida in London at Bloomberg.