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Goldman Sachs warns over cocoa and coffee prices

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Goldman Sachs cautioned over prospects for one of the best performers in agricultural commodities, cocoa, and one of the worst, arabica coffee, saying that healthy supplies looked like weighing on prices.

The bank acknowledged the threat to cocoa output in West Africa from dryness, "likely reducing the 2013-14 output potential from the world's largest producing region".

Extreme heat in July, followed by an August which brought persistent cloud but rains of one-half, or less, of normal levels has been blamed for supressing development of flowers and cocoa pods, boding ill for the region's main crop harvest.

This following mid-crop harvests which fell short of expectations too in the top producing countries of Ivory Coast and Ghana.

'Limited upside for now'

The concerns have crystallised in cuts of up to 150,000 tonnes in forecasts for the Ivory Coast main crop, typically about 1m tonnes, while US-based KnowledgeCharts last week forecast world cocoa deficits in of 209,000 tonnes 2012-13, and of 188,000 tonnes in 2013-14, which starts next month.

The International Cocoa Organization pegs the2012-13 deficit at 52,000 tonnes.

Goldman Sachs said: "With cocoa grind posting strong growth across regions, 2013-14 will likely feature a second consecutive draw on global inventories and support cocoa prices.

However, the bank forecast "limited upside for now given the still high cocoa stocks-to-use ratio".

While rolling its cocoa price forecasts forward, so taking an estimate of New York futures of $2,300 a tonne out of its estimate table, its expectations for prices remain a little below the futures curve.

Cocoa has been one of the best-performing commodities of the summer thanks to the production concerns, with New York's December contract hitting $2,599 a tonne on Wednesday, its highest for nearly a year, and representing a gain of 19.6% since the end of June.

'Downside risk'

Conversely, arabica coffee futures have been a dismal performer, continuing to set four-year lows, most recently last week, when the best-traded December contract dropped to 115.25 cents a pound.

"Arabica coffee prices continued to decline last month as the end of the harvest approached in Brazil with the lack of frost allowing for record production in the off-year of its biennial production cycle," Goldman said.

Brazil's official Conab bureau on Tuesday nudged higher by 150,000 bags to 36.66m bags its estimate for this year's arabica crop.

"Continued weakness in the Brazilian real further depressed prices as it increases the incentive for Brazilian farmers to market their crop overseas," Goldman Said, cautioning against expectations of a rebound in arabica prices.

The extent of the surplus in the beans "will bring stocks to their highest level in five years and creates downside risk to our recently lowered price forecast of 130 cents a pound".


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