Goldman Sachs cautioned over the potential for high
inventories to curtail the rally in coffee futures even as it, again, raised price
forecasts and signalled it was open to further upgrades.
The investment bank raised its estimate for coffee prices on
three-, six- and 12-month horizons to 175 cents a pound, from 130 cents a pound,
citing the damage to Brazilian plantations from drought which set in during
December, and has seen only modest relief.
"While it is still too early to assess the full impact of
the Brazil drought, this supply disruption comes on top of continued spread of
the coffee leaf rust in Central America as well as expectations for a return of
El Nino conditions, which historically negatively impact global production,"
the bank said.
"Given these production concerns and the potential for both
the 2014-15 and 2015-16 arabica coffee supply-demand balance to be in deficit,
we expect prices to remain volatile in coming months."
'High stock levels'
However, the bank's price forecasts remain below the futures
curve, which on Monday showed prices around 200 cents a pound for contracts
Goldman, while acknowledging the potential for further upgrades
to its forecasts, cited the build-up in inventories from successive season of
world production exceeding demand.
"Our forecast remains below the current forward curve for
now as high stock levels after several years of surpluses will help cushion
this production shortfall."
Demand vs supply
In fact, world coffee production in 2013-14, at 145.7m bags,
well end up some 100,000 bags below consumption, the International Coffee
Organization said last week, making its first forecast for demand.
"World coffee consumption continues to exhibit dynamic
growth," the ICO said, estimating a rise of 2.7% in the latest year, an acceleration
on the four-year average rate of increase of 2.1%.
"Much of this growth in 2013 has come from traditional markets,
particularly the US, which have provisionally recorded strong increases in
consumption compared to 2012."
By contrast, on production, the ICO quoted a study by Alemar
Braga Rena, at the Agrônomo pela Universidade Federal de Viçosa (UFV), which
referred to Brazil's drought "as the largest climate anomaly since the 'Black Frost'
The paper also warned that "damage to the 2015-16 crop could
be even worse" than the setback to this year's harvest, with drought holding
back growth of the branches which will bear the cherries for 2015 production.