SocGen cautious on coffee, despite frost thrreat

by Agrimoney.com

Societe Generale, citing improved Colombian production, sounded a note of caution on the rally in arabica coffee prices, even as futures extended their rally into a third day.

Arabica coffee futures for September stood up 0.9% at 127.05 cents a pound at 08:00 New York time (13:00 UK time), taking their rally so far this week above 6%.

The rebound has been attributed largely to higher prices of robusta, the lower-quality coffee traded in London, which has risen on Vietnamese rains which have dented farmers' ability to dry beans, and to producer withholding of stocks which has lifted premiums on the country's beans to a two-year high of some 100-130 a tonne.

However, arabica has gained its support from factors its own supplies too, with rains in Brazil, the top producer of the bean, seen threatening quality, and some yields concerns too – albeit fears strongest in areas producing robust beans.

Comexim, the Brazilian trading house, this week cut its estimate for Brazil's production of conilon beans, a type of robusta coffee, by 3.8m bags to 13m bags.

'Dramatically lower'

Nonetheless, Societe Generale - which has forecast arabica coffee prices recovering above 150 cents a pound heading into next year, implying further scope for the futures revival – flagged a headwind to the rally from improved Colombian production.

Colombia, the second-ranked grower of arabica beans, produced 913,000 bags of coffee last month, a 37% improved on June 2012, and taking the increase so far the 2012-13 marketing year, which started in October, to 23%.

Even assuming Colombia's full-season coffee production ends up at 9.8m bags - 200,000 tonnes short of the forecast by Fedecafe, whose projections in the past have proved optimistic – this would add an extra 1.5m bags to SocGen's assumptions for world supplies.

"Importantly, this implies a downside risk of over 10% to our current price forecasts," SocGen analyst Chris Narayanan said.

"While still above the forward curve, as of writing, this is dramatically lower than what we expected, despite the recent price action seen."

Frost threat

Mr Narayan acknowledged threats, including of Brazilian frost, which could yet drive prices more significantly higher.

"A cold front is expected to bring some 13 cm of rain to São Paolo and Paraná beginning later this week , while temperatures are expected to fall below freezing next week," he said.

"Any damage to coffee trees or delays in harvest is expected to alleviate some of the expected global surplus and help support prices. "

However," we now see more downside risk than upside risk to our quarterly price forecasts", he added.

"We are far less bullish than we once were."

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