Marex Spectron, saying that funds are "too short, too soon" in arabica beans, flagged the prospect of a recovery in coffee prices, despite becoming the second commentator this week to raise estimates for world supplies.
Coffee prices are "towards the bottom of a range", the London-based commodities house said, flagging the squeeze on world supplies from a reluctance by Brazilian farmers to sell, after a harvest depressed in 2017 by being an "off" year in the country's cycle of alternate higher and lower producing years.
"Brazil is not a seller, reflected in Brazil exports being historically slow and differentials being very firm," Marex said. "The supplier of 32% of the world's coffee doesn't like the price."
'Battle' between producers and funds
Indeed, Brazilian coffee growers - "well financed" after a period of selling stocks at time when domestic prices have been supported weakness in the real – have a "genuine choice" between selling or rebuilding inventories in the hope of higher values.
"At this price, [the farmer] will build stock," Marex said. This will put pressure on funds, which "are too short, too soon and at the wrong price".
According to latest data from the Commodity Futures Trading Commission, managed money, a proxy for speculators, held a net short of 40,511 lots, not far shy of the record high of 43,619 contracts set in June.
This net short position "is too big and vulnerable", said Marex, adding that it was lining up "behind the Brazilian farmer… in this battle" between producers and funds. The fund short position "should provide the catalyst for the move higher" in prices.
Supply hopes raised
The comments came even as the group raised by 1.1m bags, to 2.0m bags, its estimate of the world production surplus in 2016-17, and halved to 2.2m tonnes its forecast for the output deficit this season.
The revisions reflected largely improved ideas on output in Vietnam, the top robusta-growing country, where last season's crop was upgraded by 500,000 bags to 25.0m bags, and the forthcoming harvest by 1.0m bags to 29.0m bags, following "excellent rains".
On Tuesday, Rabobank also raised its estimates for world coffee supplies, seeing a 1.1m-bag surplus in 2016-17, compared with a previous figure of a 200,000-bag deficit, with the change attributed to "changes in Uganda and some smaller origins". For the current marketing year, the bank cut by 1.2m bags to 4.9m bags its deficit forecast. Marketing years are typically seen as running on an October-to-September basis.
Record Brazilian harvest ahead?
Marex Spectron, despite its sanguine comments on coffee prices, flagged the potential for a large Brazilian harvest in 2018-19, potentially of 65m bags if weather proves perfect. The arabica harvest could reach 48m-50m bags, and the robusta crop 15m-16m bags.
"But we will not know until January-February," the group said, adding that "the world needs Brazil to produce a record crop".

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