Prices of both arabica and robusta coffee are poised for
gains, Marex Spectron said, cutting its forecast for the world coffee output
deficit to a "scary number", and foreseeing an end to a "stand-off" in the
The broker said it was "bullish" on prices of both New York arabica
coffee and London-traded robusta beans, foreseeing a scenario "whereby each
market encourages the other to go higher".
Futures which in New York have retreated markedly from a
multi-month high of 176.00 cents a pound reached in November - while in London
showing a more modest retreat from a four-year top of $2,282 a tonne set in
January – are "closing in a major low".
The comments came as Marex raised from 3m bags to 4.25m bags
its forecast for the world coffee production deficit in 2017-18, and only saw
the market coming within 100,000 bags of balancing this season thanks to factoring
in the 1.55m bags of government stocks sold by Brazil.
The upgraded estimate for the 2017-18 world production
deficit, which follows a similar move by Rabobank on Tuesday, leaves the figure
at an "enormous number", said James Hearn, co-head of agriculture brokerage at
Marex estimates for world coffee output, minus demand, by season
2017-18: -4.3m bags
2016-17: -0.1m bags*
2015-16: -2.4m bags
2014-15: -3.8m bags
2013-14: +5.8m bags
*2016-17 number adds in 1.55m bags of coffee released from Brazilian government stocks
"It is a scary number if it comes to pass," he said. "The
forward balance sheet is getting tighter."
Mr Hearn added that "we are beginning to see signs that the
market is turning. Brazilian diffs are firming. Colombian diffs are firming.
"I think as we move forward in time, the [futures] market
'Cupboard in Brazil
is now empty'
In the arabica market, the upbeat price forecast reflected
ideas of a 5.5m-bag drop to 39m bags in output in to grower Brazil in 2017-18 –
an "off" year in the country's cycle of alternate higher and lower producing
Indeed, the market for the unwashed arabica that Brazil
produces "will be in deficit in 2017-18", meaning that "demand will need to be
rationed" through price differentials of the beans to values of robusta coffee,
and indeed to the washed arabica supplied by the likes of Colombia.
After the release of government stocks, which concluded with a sale last Wednesday of 3,733 bags of arabica coffee
as old as 15 years, "we think that the cupboard in Brazil is now empty" in
terms of state inventories, Mr Hearn said.
With private stocks also "very low", shipments from Brazil
"will keep declining over the next year to 18 months".
'About to run out of
It was doubtful that funds had much extra ammunition to
throw at the arabica market too, given that their gross short position – as
measured by the overall non-commercial category - is already historically high,
exceeded only in November 2103 and September 2015.
It was likely that the "gross short is close to a maximum",
Mr Hearn said.
"We do believe that system funds are about to run out of
bullets" in terms of selling pressure.
Fund vs consumer
By contrast, the London robusta market was marked by a large
long position among funds – which were in a "stand-off" with consumers, holding
large numbers of short bets.
"There is going to be
a winner and a loser," Mr Hearn said, foreseeing funds as more likely to end up
"There is greater probability that the market will resolve
higher and not lower," he said, viewing a second consecutive world robusta
production deficit as "probable" in 2017-18 thanks to rain damage to Indonesia's
output, and a "poor cherry load" on Brazilian conilon trees.
While Vietnam was poised for a strong harvest in 2017-18,
the country's producers were largely sold out for now.
"Vietnam has historically never been better sold at this
time of year," Marex said.