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
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
"Production practice improvements have helped to alleviate
this variance of the on-off crop year cycles," SocGen analyst Christopher Narayanan
Brazilian growers have modified strategies in areas such as
pruning, irrigation and fertilizer in order to reduce the variance in arabica
'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.
SocGen forecasts for arabica coffee prices, and (change on previous)
Q1 2013: 147.93 cents a pound, (-40.21)
Q2 2013: 154.66 cents a pound, (-42.03)
Q3 2013: 156.84 cents a pound, (-42.63)
Q4 2013: 159.37 cents a pound, (-43.31)
2013: 152.95 cents a pound, (-43.80)
2014: 152.22 cents a pound, (-52.87)
Prices for period average, New York spot contract
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."
The comments come as coffee prices remain a little under 150
cents a pound, half levels reached in May 2011.
SocGen forecasts for world coffee 2013-14 and (year-on-year change)
Output: 148.6m bags, (-1.3%)
Demand: 141.9m bags, (+0.2%)
Surplus: 6.70m bags, (-25%)
Ending stocks: 42.5m bags, (+64%)
Stocks-to-use ratio: 16.6%, (+6.5 points)
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."