'Tight' robusta supplies to secure 'large' spot premium - Rabobank

29.08.2017

The robusta coffee futures curve could witness steep backwardation, thanks to "tight" supplies, Rabobank said, even as it cut its forecast for the overall world coffee output deficit in 2017-18.

The bank said that robusta coffee market is "nearly the peak" of an output deficit stemming from a series of crop setbacks in major growing countries, including top producers Vietnam, where the 2016-17 harvest was pegged at a four-year low of 26.3m bags, down 2.1m bags year on year.

"Only a very good Vietnamese crop will alleviate the deficit," Rabobank analyst Carlos Mera said, in fact forecasting a bumper 28.7m-bag crop for 2017-18, for which harvesting begins later this year.

Until supplies from this harvest hit export markets in December, or early in 2018, "the robusta market will be tight".

The bank pegged the world production robusta deficit in 2017-18 at 2.9m bags, 200,000 bags smaller than prevoiusly expected, but following on from a deficit for last season nudged higher to 3.8m bags.

'Large front-month premium'

With stocks of robusta available for delivery against London robusta futures in decline too, down some 5% over the past month according to Ice exchange data, "a large front-month premium… cannot be ruled out" for the September and November futures contracts, Rabobank said.

This steep premium could extend to the January 2018 lot if rains hamper the Vietnamese harvest, so delaying the supply of beans to the world market.

September robusta coffee futures stood at $2,128 a tonne on Friday, up 0.8% on the day, and at a premium of $37 a tonne to the November contract.

The November lot, at $2,081 a tonne, was priced $32 a tonne above coffee for January 2018 delivery, which in turn held a premium of $16 a tonne over the March 2018 contract.

'Subdued' arabica price outlook?

By contrast, the New York arabica market was trading in so-called "contango", a more typical trading pattern, in which near-term contracts trade at a discount to those further ahead, reflecting costs of storage for crop, and allowing some risk premium too.

The best-traded December arabica contract, for instance, was trading at 128.55 cents a pound, a discount of 1.50 cents a pound to the March 2018 lot.

Indeed, Rabank flagged decreased expectations for the global arabica coffee production deficit in 2017-18, cutting its forecast for the shortfall by 600,000 bags to 3.1m bags.

It also raised by 1.1m bag to 3.7m bags its estimate for the world arabica output surplus in 2016-17.

The prospect of Brazil - which sees alternate years of higher and lower output - in 2018 reaping a "bumper" arabica crop "could keep futures prices subdued", Mr Mera said, if restating surprise revealed earlier in the week at the lack of volatility in the market, given the country's looming and weather sensitive flowering period.

'Multi-million dollar question'

The improved estimates for world arabica coffee supplies reflected largely increased ideas of Honduran output, for which Rabobank raised its estimate for the 2016-17 crop to 7.2m bags, based on strong export data.

"The multi-million dollar question is as to whether Honduras can have another bumper crop" in 2017-18.

Mr Mera ruled out a "large drop" in production, but said that, with evidence of tree stress following the latest strong harvest, said it was "possible" for the 2017-18 harvest to retreat to 6.5m bags.


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