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Commerz, Procafe clash over Brazil coffee outlook

Commerzbank clashed with Brazilian research group Fundacao Procafe over the longevity of the hit to coffee production prospects for this year's drought, downplaying the threat of a hangover for the 2015 crop.

The bank, in a report which also curbed expectations for cocoa price rises, said that investors were taking too gloomy a view on production Brazilian coffee output prospects by pricing in arabica futures above 200 cents a pound from the September 2014 contract heading into 2017.

"We will probably only see prices settling above the 200-cents-a-pound mark on a lasting basis if the worst forecasts materialise and the outlook for 2015 were to darken significantly to on the back of possible weather turbulences in the second half of the year [2014]," Commerzbank said.

"For us, such an expectation is merely a risk scenario."

'No significant damage'

Indeed, the Brazilian harvest this year "will not be quite as bad as the most pessimistic forecasts currently predict", with many commentators having downgraded significantly their production estimates, following the drought which hit the country's coffee belt earlier this year.

Furthermore, the bank said that "we still believe that the drought will not result in significant damage for the crop next year".

The comments contrast with those from observers who believe that 2015 Brazilian coffee output will prove weak too, given that crop is borne on branches grown the previous year and with new foliage growth in 2014 having been limited by the lack of rainfall.

Procafe forecasts

Indeed, separately on Thursday, Fundacao Procafe underlined its forecast made last month that Brazilian coffee output may fall further next year, to 38.7m-43.6m bags.

This compares with the 40.1m-43.3m bags the group has forecast for this year, one of the lowest estimates in the market, and well below figures as high as 60m bags expected before drought struck.

Fundacao Procafe agronomist Jose Matiello said his research, on more than 500,000 hectares of the 8.5m hectares in Brazil's coffee belt, showed the biggest impact of drought in the heart of the region, and with a particular reduction to supplies of larger beans.

"On the bright side, the crops of 2016 and 2017 should produce well after two years of poor output," he told the International Coffee Seminar conference in Guaraja, Brazil.

Tricky forecast

Forecasting the size even of this year's crop is viewed by analysts as difficult, given the size of Brazil's coffee growing district and the unprecedented nature of this year's drought.

At P&A Marketing, Carlos Brando said that "estimates are even more complex for the 2015 crop because they require evaluation of damage to the root system that may affect the differentiation of the buds," and the ratio between those forming flowers or leaves.

And this is before considering the development of branches bearing the buds.

"In addition, even if, in the best scenario, rainfall returns to its normal pattern, the water deficit projected for the beginning of the next rainy season will be still above what is suitable for arabica cultivation and will compromise the ability of the plant to sustain the formation of new cherries," he said.

Downbeat on cocoa

Commerzbank's comments came in a report in which it also sounded a relatively downbeat note on cocoa prices, citing the "surprisingly positive" production results from West Africa, where deliveries of beans to ports so far in 2013-14, which started in October, are running some 10% higher year on year.

With analysts foreseeing a 16% rise to 440,000 tonnes in the Ivory Coast midcrop, currently being harvested, world cocoa production is "likely to grow more sharply" than the 4.1% rise anticipated by the International Cocoa Organization.

Meanwhile, with cocoa grind data for the January-to-March quarter showing growth of 0.3% in Europe and 1% in North America, and 3.7% expansion in Asia "mediocre at best", the ICCO's forecast of world consumption growth of 2.4% this season may be overoptimistic too.

"We no longer see any scope for major price rises in the foreseeable future and envisage a cocoa price of 1,900 per tonne [in London] at the end of 2014," the bank said.

Futures fall

Cocoa futures for July stood at a three-month low, for a nearest-but-one contract, of 1,784 per tonne in afternoon deals in London, down 0.9% on the day.

New York cocoa for July was 0.8% down at $2,877 per tonne, having earlier hit a three-month low of $2,869 per tonne.

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