Tue Mar 4, 2014 8:29am EST

LONDON, March 4 (Reuters) – Arabica coffee futures stayed close to the prior session’s two-year peak on Tuesday, supported by concerns about damage to coffee crops in top producer Brazil from a prolonged drought, though trade was choppy.

Prices have surged 75 percent so far this year, fuelled by concerns over the impact of the unseasonably dry weather in Brazil on coffee beans in the coming 2014/15 crop.

“Markets are taking a ‘worst case’ view of the situation, which does leave some downside potential if the damage turns out to be not as bad as expected,” said Tom Pugh, commodities economist with Capital Economics in London.

ICE second-month arabica futures jumped almost 2 percent to a session peak of $1.9760 per lb, just below Monday’s two-year high of $1.9780 and within sight of the psychologically important $2 level, before falling back in a technical correction to trade down 1.15 cents or 0.6 percent at $1.9230 per lb as of 1252 GMT.

Analyst Stefan Uhlenbrock of F.O. Licht forecast that coffee output in Brazil would fall by around 5 million 60-kg bags to 48 million bags in 2014/15.

“Even if there is a deficit in ’14/15 there is not yet the danger of the world running out of coffee because of the stocks accumulated during the surplus period,” Uhlenbrock said.

Hot, dry weather in Brazil has damaged as much as 45 percent of the coffee beans in the worst-hit area of Minas Gerais, the nation’s biggest coffee-producing state, a study by the local government showed last week.

The agriculture secretariat of Minas Gerais said the area of Tr锚s Pontas in South Minas, the state’s most important growing region, suffered losses in output to 45 percent of its crop due to the drought.

Minas Gerais produces half of Brazil’s coffee, with South Minas alone accounting for a quarter of national coffee output.



Pugh said coffee futures markets would carefully track data gauging the extent of damage to coffee crops from drought, and Brazilian weather reports.

“Official data releases could cause big swings in the market. People are really on edge,” he said.

“It’s a bit overdone. I don’t think there have been any reliable estimates for damage yet. I would not be surprised to see prices fall back quite sharply over the next couple of months.”

In other softs markets, second-month Liffe robusta coffee was up $17 or 0.8 percent at $2,115 per tonne in moderate volume of 4,380 lots.

ICE raw sugar futures were lower against the backdrop of a global supply glut, with May down 0.21 cent or 1.2 percent at 17.59 cents a lb.

“The general chat around the trade seems to be of a negative tone with a consensus of scant underlying physical buying and the collapse of the March/May on expiry night (Friday) indicating the potential weakness of the market,” said Thomas Kujawa, co-head of the softs department at brokerage Sucden Financial Sugar.

May white sugar futures on Liffe fell $4.20, or 0.9 percent, at $473.60 per tonne in slim volume of 935 lots.

ICE May cocoa futures were up $14, or 0.5 percent, at $2,932 per tonne, underpinned by expectations of a global deficit and firm demand.

May cocoa futures on Liffe climbed 4 pounds, or 0.2 percent, to 1,829 pounds a tonne in slim volume of 2,955 lots.