Taking stock of arabica coffee performance Coffee drinkers rejoice. Coffee farmers not so much. Arabica coffee, the higher quality bean loved by espresso aficionados, has been the worst-performing agricultural commodity this year, down almost 20 per cent since the start of 2012. The drop is a far cry from last year: arabica coffee prices hit a 34-year high in March 2011 amid fears of a shortage. Since then, much has changed. From a peak of $3.089 per pound nearly a year ago, prices are down roughly 40 per cent to $1.851 per pound. Inventories of high-quality beans remain low, but the threat of a shortage has vanished as Brazil is expected to see a bumper harvest this year. Brazil is the world's largest coffee producer and the outlook for a large crop has prompted hedge funds and other speculators to bet on lower prices. Short positions started to accumulate after mid-January, when Brazilian producers started to forward sell their crop to lock in prices. With no buying support from consumers, the market went into a "technical spiral" downwards, says Rabobank, the Dutch bank that is one of the biggest lenders to the agribusiness industry. The hedge funds have accumulated the largest net short positions since 2007. While the tumble in prices might be good news for coffee drinkers - and chains such as Starbucks - it has scuppered the plans of the Brazilian government to sell its stocks. At the start of the year, Brazil, which supplies about a quarter of global coffee, said it planned on releasing its state-controlled stockpile to take advantage of the high price of arabica coffee. The announcement weighed on prices, as Brazil controls stocks equal to roughly one per cent of global supplies. Conab, Brazil's official crop bureau, said after its last coffee auction in January, that a second auction scheduled for February had to be cancelled due to administrative problems. By the time this had been resolved, prices were already too low to sell. Conab no longer expects to clear its stocks before the 2012-13 bumper harvest in May. The coffee authorities have a stockpile from the 2009-10 crop which they bought to support prices. The Brazilian government is facing a catch 22 situation: it cannot sell its stocks because prices are too low; but with inventories dating back to as early as 2000-01, it has not much space left to buy this crop season if prices plunge further and it needs to support the country's farmers. The stock building since 2000 has left Conab with beans more than 10 years old, and Brazilian rules will force the agency to sell the oldest stocks first. Old beans usually trade at a discount to new beans. According to Conab, its 2002-2003 stockpile totals 3.98m kg, and 1.9m kg in 2008-09. While these amounts are negligible, its 2009-10 stocks are more significant at 91m kg. The market does not expect Conab to sell soon, but the overhang is not helping sentiment. Hedge funds could still harvest more profits betting down.