Societe Generale cautioned over a retreat in coffee prices,
even as arabica futures hit an 18-month high, but the bank flagged some potential
for gains in cotton and sugar markets.
While the bank raised marginally its forecasts for
quarter-average prices of New York-traded arabica coffee futures, the estimates
remained well below those that investors are factoring in.
In the October-to-December period, for instance, the bank
forecast front-month arabica coffee futures averaging 132 cents a pound, well below
the 154.65 cents a pound at which the December contract was trading at on
The contract touched 155.70 cents a pound earlier, the
highest for a nearest-but-one lot since February last year, with prices supported
by strength in the London robusta coffee market, after a downgrade earlier this
week by the official IBGE institute to its estimate for Brazilian output this
However, SocGen said that the notable extent of coffee
stocks in importing countries will undermine prices, more than offsetting the
potential boost from a look ahead to 2017-18, which should bring a dip in
Brazilian arabica bean output, following on from the bumper crop of the variety
'High enough to
"Though inventory levels in producing countries are near
historical lows, inventory levels in consuming countries are high enough to
depress prices" should production prospects ahead fall short of expectations,
SocGen analyst Rajesh Singla said.
He flagged US Department of Agriculture estimates that
stocks-to-use ratios – an indication of supply tightness, and therefore the
extent of which buyers are forced to pay up for supplies – will not show huge
falls over 2016-17.
In the EU, which accounts for 30% of world arabica
consumption, the stocks-to-use ratio will drop by 2.1 points year on year to
22.9%, while that for the US, responsible for 16% of global use of the bean,
the ratio will fall by 1.5 points to 24.4%.
"We still prefer to remain below the forward curve due to
higher inventories," Mr Singla said.
The comments tally with those last week from Rabobank, which
is also downbeat on arabica futures, seeing prices average 138 cents a pound in
the last three months of 2016.
Rabobank said last week that "visible" coffee stocks - defined
as those in Europe, Japan and the US, besides non-farm inventories in Vietnam –
"are at record levels".
However, many other investors are seeing weak stocks in
producer countries as justifying stronger prices, besides low levels of stocks
held for delivery against futures.
Stocks of arabica coffee held at ICE-monitored warehouses
fell on Wednesday to a five-year low of 1.27m bags, data from the exchange
On sugar, SocGen forecast New York futures holding over 21
cents a pound, on average, for the next three quarters, ahead of prices being
traded on Thursday.
The best-traded October lot was priced at 20.06 cents a
pound in morning deals.
The bank - terming itself "cautiously bullish" on prices -
flagged the prospect of a world sugar output shortfall in 2016-17 "despite
circa 39m tonnes of production from Brazil", the top producing country.
Furthermore, "the real may continue to lend support to
prices due to attractive bond yields in the country," with a stronger Brazilian
currency boosting the value, in dollar terms, of assets in which the South
American country is a key player.
For New York-traded cotton, SocGen forecast futures trading
at about 71 cents a pound into 2017, a little ahead of current prices.
The bank flagged the dent to production prospects in India
from rain shortfalls in Gujarat, and "pest attacks" in Punjab and Haryana.
"As the weather remained hostile for planting in India, and
might impact the US crop, we expect the US Department of Agriculture to downgrade
global production estimates in coming months."