January 30, 2013 7:44 pm

Brazilians smooth out arabica output cycle

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Luiz Saldanha Rodrigues, a coffee estate owner in southern Brazil’s Paraná region, is among the new generation of growers transforming the country’s coffee industry.

Equipped with degrees in agronomics and knowledge of new plant management techniques, this army of younger coffee growers is a big reason for the shift to a smoother production cycle. Their arrival is threatening to wipe out an opportunity for investors to make millions.

Brazilian coffee growing has traditionally followed a cycle of huge biennial swings, with an “on” year of large production followed by an “off” year of low output for arabica, the higher quality bean used for espressos and cappuccinos.

These large fluctuations in output have for years affected prices in the overall coffee market but have now virtually disappeared, say coffee industry executives and analysts. The shift is a sea-change for the arabica market, where Brazil accounts for 40 per cent of production.

“My generation is changing the coffee industry,” says Mr Rodrigues.

After a bumper crop in 2012, the country’s arabica output is heading for another large harvest this season. Brazil’s arabica output for the 2013-14 crop year is expected at 36m bags of 60kg, only 5.5 per cent lower than 2012-13, according to the country’s official crop bureau Conab. In the past, the difference between peak and trough in the biennial ‘on-off’ cycle could be as much as 40 per cent.

“The depth of the ‘on-off’ cycle has been reducing for some years and the difference between the next two crops looks to be the smallest ever,” says James Hearn, co-head of agriculture at commodities broker Marex Spectron in London.

The changes, while good news for consumers worldwide, are a potential headache for a small cadre of specialist hedge funds and other commodities investors that have made millions for decades betting on the intensity of the on-off cycle.

Carlos Brando, director of P&A International, the marketing and consulting arm of Brazilian coffee machinery maker Pinhalese in São Paulo, says the changes have been in progress for a while.

The expansion of coffee plantations in the northern areas, which are less prone to frosts, has mitigated damage from cold weather, while the increased use of irrigation has had the dual effect of minimising crop losses due to droughts and helping coffee trees to recover faster from the stress of bearing a large crop. Better fertilisation has also helped plants recover after bean production while plant breeding has led to more drought resistant trees.

Mr Rodrigues, whose family in 2004 bought the Fazenda California estate that had been producing coffee for 100 years, took out 600,000 coffee plants and replaced them with 850,000 new trees of a more resilient variety. The changes have been happening across the country. “Our generation in the 30s and 40s are showing Brazil a more professional way of agribusiness,” he says.

Coffee growers have also mechanised harvesting, which was traditionally done by hand, enabling two or three harvesting rounds instead of a single round. This has relieved the trees from the burden of carrying extra coffee beans, conserving nutrients. Pruning strategies, where some trees are drastically pruned to prevent overproducing during an “on” year and instead produce beans in an “off” year, has smoothed the output volatility, says Mr Brando.

Better soil and root management and higher plant density has increased production as well as yields, says Mr Rodrigues. While the previous owners had harvested 2,500 to 3,000 bags from 240 hectares, Fazenda California is now producing 9,000 bags, he adds.

As a result, the supply and demand of arabica beans will be more predictable. Absent the extreme changes in the weather, such as a severe frost or drought, this in turn will mean that coffee roasters will not need to buy beans far forward in order to secure supplies and fix prices as they have done in the past.

The productivity increases, which have flattened out supply fluctuations as well as boosting output in Brazil, have come at a time when the arabica supply from other Latin American countries is being threatened by roya, or leaf rust, a deadly fungal disease. Countries including Guatemala, Honduras, Costa Rica, and El Salvador, which account for about 17 per cent of global arabica supply, have warned of significant damage. However, despite the recent reports of fungus damage, prices have remained unmoved, partly due to the expected supplies from Brazil.

Keith Flury, analyst at Rabobank in London says: “The market is being overshadowed by Brazil.”

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