US arabica coffee futures settled up more than 2 percent at a three-week high on Wednesday, bolstered by speculative buying on colder-than-expected temperatures in top coffee producer Brazil, market sources said.
While traders did not anticipate a crop-damaging chill in Brazil, an unexpected drop in temperatures in hours was enough to prompt speculators to cover their short positions before the end of the quarter and a US holiday next week.
The New York Board of Trade's active coffee contract for September delivery climbed 2.40 cents to settle at 99.10 cents a lb, the contract's loftiest finish since June 8, after trading from 97.10 cents to 99.90 cents.
Back month arabica futures climbed 2.35 to 2.45 cents while front-month July gained 2.35 cents to 97.70 cents a lb. "There was some colder weather overnight (in Brazil) and there is talk of another cold front coming the next 12 to 14 days out," said a coffee trader at a commodity brokerage.
"There was a little bit of short-covering today," he added, pointing out that non-commercial participants were holding a net short position close to 10,000 lots of NYBOT arabica futures.
Brazilian coffee farms turned unexpectedly cold at dawn on Wednesday with temperatures falling near freezing, but trees remained unharmed by the cold snap, private Brazilian forecaster Somar said. "Cooler weather continues today, but then it should turn warmer.
We do not expect damaging cold to occur from this cooler weather," US forecaster Meteorlogix said in its daily crop weather report. Market participants are wary about crop-damaging frost harming the production potential of Brazil's 2007/08 crop, which is already expected to be significantly smaller than the 2006/07 harvest due to the biennial coffee crop cycle.
Brazil's 2006/07 (July/June) harvest is officially forecast to be about 23 percent higher than the previous season. "You are going into the guts of the winter in Brazil and the spec is short here, so they are pulling out positions," said Jack Scoville, a vice president at the Price Group.
"It is going to be cooler but not enough to really float anybody's boat just yet." Final estimated futures trading volume reached 18,781 contracts on the NYBOT, up from the 11,729 lots officially tallied the previous day.