Arabica coffee futures, at amongst their lowest levels in three years, may have reached the bottom, Societe Generale said, even as it "dramatically" reduced price estimates, citing improved hopes for Brazilian and Colombian crops.

The bank slashed its forecasts for arabica futures heading out to 2018 by up to 80 cents a pound, citing the "gradual improvement" expected in output in Colombia, the second-ranked producer, thanks to a tree replanting programme and to improvements in farm practices.

It also flagged signs that the two-year cycle of higher and lower producing crop years in Brazil, the top arabica country, may be showing of waning.

"Production practice improvements have helped to alleviate this variance of the on-off crop year cycles," SocGen analyst Christopher Narayanan said.

Brazilian growers have modified strategies in areas such as pruning, irrigation and fertilizer in order to reduce the variance in arabica output.

'The biggest risk'

However, with SocGen's fresh price forecasts close to the current futures curve, the bank said it saw "downside risk as limited" for values already factoring in a strong Brazilian arabica crop in 2013-14, for an "off" year, and the revival in Colombian output.

The bank said it was "sceptical of the significant 2012-13 rebound [in Colombian production] that many are expecting".Furthermore, an outbreak in Central America of coffee leaf rust, a disease caused by the roya fungus, was underpinning prices, with losses estimated at 30-50% in some areas.

"Given the relatively small production compared to Brazil and Colombia," with Central America combined responsible for 14% of world coffee output, "we view this situation as mildly supportive of arabica futures prices," Mr Narayanan said.

However, the losses may have added significance if accompanied by disappointment in one of the top producing countries, eating into a global coffee production surplus the bank pegged at 6.7m bags.

"Supply shocks remain the biggest risk to coffee prices."

Demand switch

The comments come as coffee prices remain a little under 150 cents a pound, half levels reached in May 2011.

The spike in prices then fuelled a switch in demand to cheaper, robusta coffee which has failed to show much sign of reversing. In Brazil itself, "it is worth noting that coffee consumption is rising 3.0-3.5% per year, but much of that increase is attributed to domestic consumption of lower-grade coffee in the recent past," Mr Narayanan said.

"Another risk to our longer-term forecast is a shift to premium coffee for Brazilian consumers, particularly if [arabica] prices remain depressed and encourage more consumption."