'Scary' deficit in coffee output to spur price gains, says Marex


Prices of both arabica and robusta coffee are poised for gains, Marex Spectron said, cutting its forecast for the world coffee output deficit to a "scary number", and foreseeing an end to a "stand-off" in the London market.

The broker said it was "bullish" on prices of both New York arabica coffee and London-traded robusta beans, foreseeing a scenario "whereby each market encourages the other to go higher".

Futures which in New York have retreated markedly from a multi-month high of 176.00 cents a pound reached in November - while in London showing a more modest retreat from a four-year top of $2,282 a tonne set in January – are "closing in a major low".

The comments came as Marex raised from 3m bags to 4.25m bags its forecast for the world coffee production deficit in 2017-18, and only saw the market coming within 100,000 bags of balancing this season thanks to factoring in the 1.55m bags of government stocks sold by Brazil.

'Scary number'

The upgraded estimate for the 2017-18 world production deficit, which follows a similar move by Rabobank on Tuesday, leaves the figure at an "enormous number", said James Hearn, co-head of agriculture brokerage at London-based Marex.

Marex estimates for world coffee output, minus demand, by season

2017-18: -4.3m bags

2016-17: -0.1m bags*

2015-16: -2.4m bags

2014-15: -3.8m bags

2013-14: +5.8m bags

*2016-17 number adds in 1.55m bags of coffee released from Brazilian government stocks

"It is a scary number if it comes to pass," he said. "The forward balance sheet is getting tighter."

Mr Hearn added that "we are beginning to see signs that the market is turning. Brazilian diffs are firming. Colombian diffs are firming.

"I think as we move forward in time, the [futures] market should firm."

'Cupboard in Brazil is now empty'

In the arabica market, the upbeat price forecast reflected ideas of a 5.5m-bag drop to 39m bags in output in to grower Brazil in 2017-18 – an "off" year in the country's cycle of alternate higher and lower producing years.

Indeed, the market for the unwashed arabica that Brazil produces "will be in deficit in 2017-18", meaning that "demand will need to be rationed" through price differentials of the beans to values of robusta coffee, and indeed to the washed arabica supplied by the likes of Colombia.

After the release of government stocks, which concluded with a sale last Wednesday of 3,733 bags of arabica coffee as old as 15 years, "we think that the cupboard in Brazil is now empty" in terms of state inventories, Mr Hearn said.

With private stocks also "very low", shipments from Brazil "will keep declining over the next year to 18 months".

'About to run out of bullets'

It was doubtful that funds had much extra ammunition to throw at the arabica market too, given that their gross short position – as measured by the overall non-commercial category - is already historically high, exceeded only in November 2103 and September 2015.

It was likely that the "gross short is close to a maximum", Mr Hearn said.

"We do believe that system funds are about to run out of bullets" in terms of selling pressure.

Fund vs consumer 'stand-off'

By contrast, the London robusta market was marked by a large long position among funds – which were in a "stand-off" with consumers, holding large numbers of short bets.

 "There is going to be a winner and a loser," Mr Hearn said, foreseeing funds as more likely to end up victorious.

"There is greater probability that the market will resolve higher and not lower," he said, viewing a second consecutive world robusta production deficit as "probable" in 2017-18 thanks to rain damage to Indonesia's output, and a "poor cherry load" on Brazilian conilon trees.

While Vietnam was poised for a strong harvest in 2017-18, the country's producers were largely sold out for now.

"Vietnam has historically never been better sold at this time of year," Marex said.


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