Coffee and sugar`s Brazilian rally

Are espresso drinkers adding more sugar to their coffee? Agricultural commodities traders and analysts have noticed that the two markets have been moving more closely together than ever over the past few months.

Coffee and sugar "appear to have struck up a symbiotic relationship" perhaps linked by the weather in Brazil, notes Michael McDougall of commodities brokers Newedge in New York.

The correlation became apparent around the end of May, when the heavy rains in Brazil started to affect the coffee crop as well as the sugar cane crushing. Between the start of June and July 20, sugar rallied almost 24 per cent, while arabica beans, the higher quality coffee traded in New York, rose 22 percent.

After easing off on profit-taking, the two markets have been rising again on worries over the return of rains as Brazilian arabica coffee enters the last stage of its harvest while the country's sugar cane crushing continues until December.

Sugar traders have always kept a close watch on Brazil, since it accounts for over a fifth of the world's sugar production and about 45 percent of exports. Adverse weather affecting the production and harvesting has always been a big factor in moving the sugar price. But the recent fluctuation in the arabica coffee price shows how Brazil is becoming a bigger factor in the market.

Arabica coffee traders have focused on production in Colombia, which has long been the leading supplier of high quality beans, known for its smooth taste. Brazil is the world's largest coffee producer, but it was better known for its bitter robusta bean production as well as lower-quality arabica bean.

But Brazil is now producing more and more higher-quality arabica coffee, that is starting to compete with top-quality producers such as Colombia and other producing countries including Costa Rica and Honduras. Keith Flury, soft commodities analyst at Rabobank in London, says that Brazil is now becoming a bigger influence on the New York arabica market.

The New York ICE futures market in a landmark decision in late 2010 said it would accept Brazilian arabicas for physical deliveries for the first time in March 2013. The first gradings of the beans started in June this year.

Although the discount applied to Brazilian beans makes it unlikely that a wave of coffee from the Latin American country will be delivered in New York, "the market has shifted from its sole focus on Colombia," says Flury.

It is unclear how long the coffee and sugar correlation may last. The phenomenon might end once the Brazilian harvests for both crops finish, say some analysts. Brazil's influence on the arabica market may also be diluted as Colombia's coffee production recovers from a wave of bad crops.