Rabobank nudged higher its near-term forecasts for arabica coffee prices, thanks to the poor quality of Brazil's crop and weak prospects for a Colombian output recovery, but cautioned of a "major risk of oversupply" long term.
The bank lifted by 5 cents to 170 cents a pound its forecast for average New York arabica prices in the October-to-December period, and to 175 cents a pound its outlook for values in the following quarter.
Values would be supported by a reluctance by Brazilian growers to sell at depressed prices, with their cash flows smoothed by government support and by profits from the previous two harvests, when strong prices supported "high returns".
New York futures in May 2011 rose above 300 cents a pound for the first time since 1997.
Brazil vs Colombia
"Well capitalised farmers in Brazil are not panic selling, and likely have a selling target that corresponds to a New York price of around 180 cents a pound," Rabobank said.
At roughly R$400 a bag, that would offer producers further profits, with costs ranging from R$220-290 a bag.
Furthermore, the widely-expected revival in Colombian coffee output on the cards, after four seasons when production has been depressed by poor weather, disease and the impact of a replanting programme, looks set to be limited by "the challenging economic environment for growers".
While the end of the La Nina weather pattern, and the maturing of replanting trees, looked were "positive" for harvest prospects, "negligible margins" during the downturn will have limited farmers' ability to invest in the likes of fertilizers to improve yields.
Colombian coffee output will rebound to 8.8m bags, a 1.1m-bag recovery over last season, but still well below levels above 12m bags seen before the downturn to last season's 40-year production low.
'Bearish for prices'
However, longer term Rabobank cautioned of the risk of "lower international arabica prices" longer term, as Brazil's flush growers invest in fresh trees and measures to improve yield.
"Investments in acreage and infrastructure will result in an increased in quality and quantity of Brazilian arabica in the next five seasons," a potential threat to values, the bank said.
Cop bureau Conab said that the area of non-producing trees roses 24% last year, implying output could "surge" by 6m bags later this decade "even with only modest yield gains".
"Given the profits in the past two seasons, the resulting production response could be bearish for prices in the four-to-five year horizon."
"In the longer term, we view the potential of oversupply in the global arabica market as a major risk."
Arabica coffee for December delivery closed 1.1% higher at 177.50 cents a pound in New York, defying a weak session for most major agricultural commodities.