Commerz ups coffee price forecasts, as Brazil robusta values soar

11.08.2016

Commerzbank lifted its coffee price forecasts, although to levels below the futures curve, even as Brazilian values of robusta beans hit a record high, narrowing their discount to arabica to a historic low.

The bank raised by 10 cents per pound, to 135 cents per pound, its forecast for average New York arabica coffee futures prices in the October-to-December period.

For robusta coffee, the forecasts for average London futures prices during the quarter was lifted by $100 per tonne, to $1,800 per tonne.

The bank noted that arabica prices are "finding support from among other things the stronger Brazilian real", which raises the dollar value of assets, such as coffee, in which the South American country is a big player, "as well as from the robusta market", which is being boosted by downbeat production estimates.

"A long period of dry weather means that the 2016-17 crop in the three key [robusta] growing countries of Vietnam, Brazil and Indonesia will probably decline year on year," Commerzbank said.

'Weaker prices ahead'

Nonetheless, the upgraded price forecasts remained below levels that investors were factoring in on Thursday, when New York arabica coffee futures for December were trading at 141.65 cents a pound, a drop of 0.4% on the day.

London robusta futures for November were priced at $1,840 a tonne, down 0.4%.

Commerzbank said that – with the prospect of fresh robusta beans, particularly from Vietnam, reaching the market as the South East Asian harvest gears up – "we expect prices to fall moderately".

And it added that, looking into 2017, "we are still confident that better supply and a weaker real will dampen the performance of coffee prices next year".

The bank's latest longer-range forecasts, released at the end of June, forecast arabica futures averaging 120 cents a pound in 2017, and robusta futures $1,650 a tonne.

'Threats to the forecasts'

However, Commerzbank acknowledged that risks to price falls "have been increasing of late", citing factoring including threats from La Nina-induced weather to output in Colombia, the second-ranked arabica-producing country.

"Growers are concerned that a La Nina phenomenon could occur, which could now be accompanied by too heavy rain, following the dry conditions brought about by El Nino."

The bank also termed "disappointing" output data for July, which showed a 25% slump to 1.1m bags in volumes, although the truckers' strike that month, in hampering bean deliveries, has made it difficult to deduce any underlying trend.

For Brazil, Commerzbank flagged the potential for a dent to output ahead from 2017 being an "off" year in the country's cycle of alternate years of higher and lower output.

Cooxupe, Brazil's top coffee co-operative, has forecast a drop of 5% in the country's arabica production next year.

Discount narrows

Brazilian arabica prices have, in the domestic market, eased from a mid-July high of R$510.12 per bag, according to research institute Cepea, standing at R$471.52 per bag on Wednesday.

However, that drop of 7.5% was, besides pressure from the ongoing harvest, largely down to currency effects, with dollar prices of arabica down only 3.7% over the same period, to $150.98 per bag.

Brazilian robusta prices, meanwhile, have continued to set fresh records, in local currency terms, reaching an all-time high of R$421.91 per bag on Wednesday, underpinned by weak output both domestically and in South East Asia.

The outperformance cut the discount of robusta beans to arabica coffee below R$50 per bag, a multi-year low, and down from more than R$100 per bag a month before.

Earlier this week, Nathan Herszkowicz, executive director of ABIC, the Brazilian Coffee Industry Association, said that the country's tight robusta supplies are encouraging roasters to adjust their blends by substituting more robusta with arabica.

He reportedly forecast that robusta use in blends will fall to 4m bags this year, from 6m-7m bags in 2015.


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