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Coffee Prices at 2.5-Year High; More Rises to Follow

Brazil is adding a few more notable pages to its history books.

The second-round runoff of the country’s tightest presidential race in decades is on October 26.

The world’s commodities markets are anxious to see who wins, as the leftist incumbent Dilma Rousseff and business-friendly Aécio Neves have opposing economic plans for the commodities-rich country.

Brazil is also experiencing the worst spring drought the country has ever had, and it’s affecting one of its biggest and most well-known exports: coffee.

Experts and traders are starting to panic over the lack of supply, and prices are on the rise.

The Price of a Cup of Coffee

Brazil is the world’s largest coffee grower. It produces about 35% of the world’s coffee and nearly one-half of the globe’s Arabica coffee bean crop.

As commodities strategist Harish Sundaresh told The Wall Street Journal, “Brazil is to the coffee market what Saudi Arabia is to the oil market.”

A drought in this country’s coffee-growing regions has a major impact on coffee prices worldwide.

The lack of rain in Mogiana, Sul Minas, and Cerrado – the country’s coffee-growing region – has delayed the tree-flowering period, which spans October and November.

No flowers means that there will be no coffee cherries next year. And no cherries means no coffee.

The weather conditions also affect the pollination of coffee trees that have already flowered. Plus, drought makes the blooms very delicate, meaning they can fall off the tree.

All this means production in 2014 is estimated to be down 13% from last year, to only 48 million 60-kilogram bags.

Dry Conditions Weaken Production: Brazilian Coffee Production

This harvest – the smallest in three years – has nearly doubled the price of coffee. Coffee prices are at a 2.5-year high with the ICE March coffee benchmark trading at $2.29 a pound.

Some consumers have already seen the effects of the low supplies. Starbucks (SBUX) instituted an 8% price rise, and Folgers, which is a brand of J.M. Smucker (SJM), raised prices by 9%.

You'll Pay More at the Coffee Shop: Arabica-Futures Prices

Unfortunately, the forecast for the region is dry with above-normal temperatures. That means your favorite cup of java is likely to get even more expensive.

Not surprisingly, predictions of continuing dry weather in Brazil have already caused some analysts to forecast next year’s coffee crop to be below 40 million 60-kilogram bags.

If this happens, prices are likely to rise another 30%, to $3.00 per pound of beans.

Since it looks like your cup of coffee is going to cost more, add a little extra change in your pocket.

Get the Good Stuff

A good way to get that extra money is through the purchase of an exchange-traded note (ETN) like the iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO).

This Barclays Bank-issued ETN is designed to track the performance of the current coffee futures contract. It followed coffee prices higher this year and is up about 85% year to date.

And “the chase” continues,

Tim Maverick

Tim Maverick

, Senior Correspondent

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