Coffee price rally could find fresh legs, says VM

by Agrimoney.com

Flagging coffee futures could yet revive to a fresh record high, VM Group said, as it cut its estimate for the production surplus, and took another swipe at Starbucks for blaming speculators for elevated prices.

It was "difficult to avoid the conclusion" that coffee markets will in 2011-12 witness more of the supply squeezes, "record tightness and extreme price volatility" which has characterised the current season, the analysis group said.

The comments came as VM, which undertakes commodities research for ABN Amro, cut its estimate for the world surplus in production of arabica beans, the type traded in New York, by 900,000 bags to 5.6m bags for 2010-11.

For 2011-12, an off season in Brazil's cycle of higher and lower production years, the arabica surplus will come in below 700,000 bags.

While prices have retreated from the 34-year highs above 300 cents a pound reached in April, "the bullish outlook remains not only intact but, if we are correct in our estimates for 2011-12, reinforced", VM said.

"The next 'target' might be 318 cents a pound – the price spot arabica that was reached in New York in May 1997."

Starbucks 'pushing demand'

The group's revision to its forecast for the arabica surplus reflected lower hopes for production, dented by the impact of La Nina weather conditions on parts of South America, while consumption has remained steadfast despite higher prices.

Indeed, while Starbucks has consistently blamed speculators for high prices, VM noted that the coffee shop giant "is doing everything it can to push demand.

"Starbucks plans to more than triple its cafes in mainland China, from 450 currently to 1,500 by 2015.

"In any case, the idea that supply is comfortably ahead of demand on a global basis does not ring true."

Data from US regulators shows speculators halving their net long position in New York coffee futures since August, to some 20,500 lots, even as prices have appreciated by nearly 50%.

Robusta forecast

VM also cut its forecast for the world surplus in robusta coffee - the variety traded in London and which is generally viewed as of lower quality than arabica – by 290,000 bags to 4.9m bags, reflecting damage caused by La Nina rains in Indonesia.

The surplus in 2011-12 was pegged at 4.1m bags, although this "could be significantly eroded" if high prices for arabica coffee force roasters to switch beans.

Arabica for July delivery stood 0.3% higher at 266.40 cents a pound in New York at 10:40 GMT.

London robusta beans for July were 0.2% lower at $2,596 a tonne.

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