ABN downbeat on cocoa, coffee prices, citing demand doubts
By - Published 26/06/2015

ABN Amro, citing the improved prospects for Brazil's coffee harvest, warned of more cuts in arabica prices yet to come, and foresaw a retreat in cocoa futures too even as they hit a nine-month high.

The bank trimmed by 5 cents to 125 cents a pound its forecast for New York-traded arabica coffee futures for the September timescale, taking the forecast further below the 135.05 cents a pound at which September futures were trading at on Friday.

Futures will end the year at about 115 cents a pound – implying a steep drop from the 139.50 cents a pound investors are pricing in, in the December futures contract.

The downbeat forecast reflected largely upgraded expectations for Brazilian output, after the return of rains this year to the key arabica-producing state of Minas Gerais eased concerns over residual damage from last year's worst-in-a-generation drought.

Output debate

"Many trading houses have revised up their Brazilian harvest forecast for the 2015-16 season, which is now looking to be 50m bags plus," said ABN agricultural commodities analyst Frank Rijkers.

Last week, the US Department of Agriculture became the latest commentator to issue an upbeat harvest estimate, pegging the crop, including robusta beans, at 52.4m bags.

Other observers foreseeing output above 50m bags including Volcafe, which has forecast a 51.9m-bag harvest, and Mercon, which puts production at 50.3m bags, although not all estimates are so upbeat.

Conab, the official Brazilian crop bureau, three weeks ago pegged the crop at 44.3m bags, while Neumann put it at 47.3m bags.

'Demand tailing off'

However, ABN also flagged the potential for further depreciation in the Brazilian real, which would cut the value, in dollar terms, of assets such as coffee in which the South American country is a major player.

"We anticipate lower [economic] growth and higher inflation for Brazil, causing the real to weaken," to average about R$3.40 to the dollar in 2016, the bank said.

"The depreciation of the real has spurred many farmers to put their coffee on the market."

But these sales had come at a time of questionable demand.

"Demand is currently tailing off as roaster have already taken positions and purchased substantial amounts of coffee," Mr Rijkers said, although again this is not a view held by all observers.

At US broker Price Futures, Jack Scoville said that while "roasters have been absent from the market for months as they work off supplies bought at much higher prices during the Brazil drought scare", some traders "now suggest that inventory levels are… even tight, and that roasters will soon begin to buy again".

Cocoa price forecasts

For cocoa, ABN hiked its forecast for New York futures by $450 a tonne to $3,250 a tonne, foreseeing an easing to $3,100 a tonne at around the end of the year.

However, these estimates remain below levels being priced in by investors on Friday, when September futures were trading at $3,326 a tonne, and the December contract at $3,317 a tonne.

September futures earlier hit $3,333 a tonne, the highest for a nearest-but-one contract since September.

The bank flagged the "sharp decline" expected in output from Ghana, the second-ranked producing country, with forecasts for a 20% drop in volumes to some 700,000 tonnes this season.

"A further factor has been the unseasonable weather" in West Africa, Mr Rijkers said, noting "too little rainfall" in Ivory Coast, as well as Ghana.

"On the other hand, slowing demand for cocoa from the food processing industry has put a ceiling on the price increases," he added.

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