Weather is to take centre stage in coffee markets, which will "likely" be marked by increasing volatility, as investors balance thin short-term supplies with the potential for a "monstrous" Brazilian harvest next year, Rabobank said.
The bank hiked by 2.8m tonnes to 2.5m tonnes its forecast for the world coffee production deficit in 2017-18, citing an increased estimate for global consumption, and reduced estimates for output in Brazil, following a recent crop tour, and Indonesia, after heavy rains.
"There are a few reports confirming that Indonesia will see little recovery this year in [in output] due to strong rains," which can "often be excessive" in the country, Rabobank analyst Carlos Mera said.
While the bank boosted its estimates for supplies heading into 2017-18, it acknowledged that the stocks-to-use ratio – a much watched pricing metric – for global coffee was "heading to a very low level" by mid-2018.
'Potentially monstrous crop'
However, the market was in the "unusual situation" too of facing a "potentially monstrous Brazilian arabica" harvest from July 2018.
The 2018 harvest should anyway be relatively large – being an "on" year in the country's cycle of alternate higher and lower producing years.
But the 2018 upswing may be particularly marked thanks to the number of plantations being rested for this year's harvest, following a strong 2016 crop.
'Exacerbated price impact'
The dynamics mean that "any weather effect" which may alter expectations for Brazil's 2018 output "will have an exacerbated price impact.
"Futures will come under increasing pressure if there is no frost over the Brazilian winter and we see a good flowering in September/early October."
Still, Mr Mera forecast in the meantime that volatility in coffee markets "will likely increase" as stocks in buying countries are drawn down from current "very high levels".
ICO price pessimism
The assessment comes amid a flat period for coffee markets, with implied volatility, on a nearest-but-one contract basis, standing at 27% for New York arabica futures and 23% for London-traded robusta futures – levels termed "relatively low" by Rabobank.
And they follow downbeat comments on Friday on coffee price prospects from the International Coffee Organization, which said that the "market currently lacks any strong signals to reverse from its current gradual decline".
"Certified stocks on the New York and London futures markets have increased further by 2.4% [month on month in March] and 1.9% respectively.
"At the same time, inventories in consuming countries continued to build up," the ICO said, highlighting that US stocks in February hit 6.45m bags, the highest since May 2003.
Rabobank in its latest ag price outlook, late last month, forecast arabica futures averaging 147 cents a pound in the October-to-December period, a price in line with where December futures were trading at on Monday.
The bank forecast London robusta futures averaging $2,100 a tonne during the quarter, below the $2,191 a tonne at which November futures were trading at.
Extracted from Agrimoney