Continued weakness in arabica coffee futures conceals a market "highly vulnerable" to a spike in prices, Marex Spectron said, in a report warning of a "potentially serious deficit" ahead in supplies of the bean.

New York arabica coffee futures - in which non-commercial investors began the month with a net short more than 18,000 lots, among the highest levels ever – are "signalling that the positioning has peaked", the London broker said.

"It is therefore highly vulnerable to a significant short-covering rally," in which prices spike as investors close these short positions.

However, futures prices are remaining under pressure, with the benchmark July contract down nearly 40% over the past year, thanks to selling from Brazilian producers, who have been behind with marketing their crop, proving reluctant to sell earlier into a falling market.

The contract on Friday closed down 0.8% at 177.15 cents a pound.

Shorts vs commercials

"Funds have a sizeable short but Brazil is poorly sold on the new crop and will, in all probability, be there to sell a rally before the funds are triggered to cover," Marex said.

The dynamic is being encouraged by a weaker Brazilian real, which has depreciated by some 13% against the dollar since the start of March - so cushioning the impact in local currency terms of the decline in New York futures, which are denominated in dollars.

And the early selling may yet have some hangover in "serving to further soften the nearby, and tighten the forward", ie enhancing the comfort of supplies earlier in the season, potentially to the detriment of those further ahead

'Potentially serious deficit'

In fact, the arabica coffee market faces a "potentially serious deficit" in 2013-14, when Brazil, the top producer, will have an "off" year in its cycle of higher and lower producing seasons.

"For the world to avoid a significant deficit… Brazil must have a (far) bigger than usual off-cycle crop," Marex said.

Yet it has been" dry in many areas in 2011 and it is probable that we will go into the flowering with low soil moisture. This will put pressure on the need for timely spring rain".

Furthermore, a second condition of avoiding tight supplies, a "significant" revival in Colombian production in its next 2012-13 crop year, is looking less likely.

"The main crop flowering is now broadly fixed and… the early signs are that the flowering does not indicate a substantial rebound."

'Another disappointing year'

Separately, Neumann Kaffee Gruppe on Friday cut by 1.3m bags, to 7.4m bags, its forecast for Colombia's 2011-12 output, down from 8.7m bags the season before.

"Colombia is having another disappointing year that forced estimates down again," the German coffee trader said.

"Colombia has persistently disappointed in the pace of its recovery from the climatic disasters caused by the heavy rains that started in 2008 and have continued through 2011."

'Good husbandry'

However, the group pegged Brazil's 2012-13 coffee harvest, now in its early stages, at 55.3m bags - comprising 36.5m bags of arabica beans and 18.8m bags of the robusta variety traded in London – higher than a 50.45m-bag estimates from Brazil's farm ministry on Thursday.

"A recent trip to the area has shown the decent aspect of the trees and the good husbandry supported by the incredible internal prices during 2011," Neumann said. 

Marex estimated the consensus forecast for Brazil's 2012-13 crop at 56.25m bags, comprising 39.25m bags of arabicas and 17m bags of the conilon robusta beans.