Deep in Brazil's Mountains, a Coffee Boom Ready to Take Hold

(Bloomberg) -- As Brazilian farmer Francisco Cesar Di Giacomo surveys his fields, he plucks a pod off a nearby coffee tree and splits it open with a penknife. He points to the thin husk: a sign that the beans inside will be plump and robust.

Here in southern Minas Gerais, the mountainous state at the heart of the nation's coffee belt, there's growing evidence that the looming crop will be enormous.

Di Giacomo, who runs two arabica farms with a combined area topping 130 hectares (320 acres) in Sao Goncalo do Sapucai municipality, expects a harvest of 3,200 bags, each weighing 60 kilograms (132 pounds). That would be a third more than last year. What's more, he's planted new trees recently and expects a crop of 5,000 bags in 2019.

The outlook for a big harvest was shared by farmers and traders during a field survey that spanned four days and more than 5,000 kilometers (3,100 miles) across the region. After years of higher domestic prices, well-funded farmers have invested generously in their plantations. Beneficial rains during the country's summer aided bean development and trees are looking green and lush.

Record Crop

Brazil is the world's biggest grower and exporter of the highly-prized arabica beans. Growers in Minas Gerais are optimistic for the 2018 season, as most trees enter what's typically the higher-yielding half of a biennial crop cycle. The government's crop-forecasting agency Conab has said the nation's total coffee production, which also includes the robusta variety, could rise as much as 30 percent to a record this year.

The supply outlook underscores why coffee is one of the worst performers in the Bloomberg Commodity Index over the past year. Arabica prices have slumped 15 percent in the last 12 months to $1.206 a pound on ICE Futures U.S. in New York.

Hedge funds are wagering on more declines. In the week ended Feb. 27, money managers had a net-short position of 56,520 futures and options, according to U.S. Commodity Futures Trading Commission data published Friday. The figure, which measures the difference between bets on a price decline and wagers on a rise, has expanded 41 percent since mid-January. The funds were last net-bullish in August.

Farmers are also positioning for lower prices.

Di Giacomo's expectations for declines prompted him to sell all the inventories he had from his last harvest, and he's already started forward sales of his 2018 crop. While the prices he's fetching have dropped to about 460 reais ($141) a bag from 480 to 570 reais he got during the 2017 season, it's still a good enough profit margin to lock in prices since his costs are range from 280 reais to 350 reais per bag, he said.

“It is impossible sell every year at high prices,” Di Giacomo, 54, said. “It is part of the game.”

Resilient Trees

Di Giacomo's gamble could pay off since even farmers who ran into problems this year have been surprised by the resilience of their crops.

Take the case of Luiz Alberto Azevedo Levy, 69, who's a fourth-generation coffee farmer in Machado municipality. Some of the 1 million coffee trees he cultivates got no rain from the end of January through mid-February and an electric failure hampered his irrigation system.

He expects to collect between 14,000 and 15,000 bags this year. But he's been surprised by bigger crops before. During the last high-yielding crop stage in 2016, he ended up with 3,000 more bags than predicted.

“It is so complex estimating the coffee harvest,” said Levy's son and namesake Luiz Alberto Azevedo Levy Jr. “We always place a bet on the farm to see who is right.”

To contact the reporter on this story: Fabiana Batista in Sao Paulo at fbatista6@bloomberg.net.

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Millie Munshi

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