Coffee rally continues, fuelled by real bounce

Coffee prices extended their rally on Friday, helped by dry weather in key growing areas, and a bounce in the Brazilian real.

Arabica coffee in New York is up more that 20% from its mid-September lows, helped by a recovery in the Brazilian real, while robusta coffee in London is up around 8% over the same period.

"The main fact is the small recovery in the Brazilian real," said Carlos Mera, senior analyst at Rabobank. "That's providing a lot of support for coffee".

Real turnaround

The Brazilian real is down around 12% from its mid-September lows.

The real remains the world's worst performing currency, weighed down by an intractable fiscal spending crises, a plummeting credit rating, and political turmoil that threatens to unseat President Dilma Rousseff.

But a commitment by governor of the central bank to defend the real exchange rate with foreign cash reserves turned the tide of the sell-off, even as momentum to impeach Ms Rousseff gathers speed.

The real weighs heavy on coffee prices, particularly arabica, of which Brazil is the world's largest exporter, as a lower exchange rate means that sellers will accept lower dollar-denominated prices.

Dryness worries

Mr Mera also noted "quite a few dryness concerns".

Areas affected by dryness include arabica exporters such as Colombia, where dry w

"Three months ago most people were expecting another increase in production, now most people are expecting a drop."

Irrigation shortfall

There is also dryness in robusta growing areas of Indonesia, Vietnam, West Africa, and Brazil.

"It is dry in the conilon area in Brazil," Mr Mera said. Conilon is the Brazilian name for Robusta.

"There is irrigation, but only 85% of the farms are irrigated," he added.

December arabica coffee in New York was trading up 3.1% in morning deals, to 132.40 cents a pound, while November robusta coffee in London was up 2.3% at $1,618 a tonne.