The rally in coffee prices isn’t over yet, Sucden Financial said, seeing arabica prices as on course to hit a four-year high – eventually – and contrasting with a more downbeat outlook from Rabobank.
Rabobank on Tuesday pegged as unsustainable the rise in arabica futures above 130 cents a pound, on a nearest-but-one contract basis, without support from the likes of shipping factors or fund buying.
The bank noted that “net imports in non-producing countries continued to come in weak” in the last three months of 2020, and the stockbuild prompted by a production surplus for 2020-21 it pegged at 10.5m bags – dwarfing the 2.6m-bag deficit it forecast for next season.
However, Sucden Financial said it was “bullish” on New York arabica futures, even at levels which have set 14-month highs this week for the nearest-but-one, May contract, although the lot on Wednesday closed down 0.4% at 137.25 cents a pound.
Four year high ahead?
While saying that “forward selling down the curve has capped prices”, the broker said that prices around and above current levels would attract short-covering “which will help support the market.
“We expect the market to push through 150 cents a pound in the third quarter of 2021,” a level not seen since February 2017, Sucden said, although underlining that “patience is vital”.
Currently, Brazil’s buoyant exports and the boost from its semi-washed supplies to exchange-certified arabica stocks – which stood at a total of 1.76m bags on Tuesday up 24% so far this year – are muffling buy signals.
However, Sucden forecast that Brazil’s exports will “tail-off after March”, with the boost to exchange stocks from the country’s semi-washed arabica beans “now coming to an end” too.
‘Trigger substantial short covering’
Such dynamics will render the market more exposed to the significant extent of short positions in arabica futures and options placed by commercial investors such as producers, and which topped 166,000 contracts earlier this month “near the extremities”, with the record at 184,087 lots.
“The significant amount of forward selling from Brazilian farmers is problematic if we get a significant rally.”
It “could lead to defaults due to margin calls and would trigger some substantial short covering”, Sucden said, noting “significant risk to exporters” if prices rise “and they have sold their coffee at 120-125 cents a pound”.
The broker flagged too that Central American coffee output prospects were “far from clear”, with a harvest which “should be in full swing” said to be encountering labour shortages stemming from Covid-19.
“We continue to see another deficit in washed arabica and fine cup coffee,” as produced in the region, “and strong differentials outline this”, with Honduran supplies trading some 20 cents a pound above futures.
‘Raising deficit expectations’
Sucden’s comments too factored in expectations of weak Brazilian arabica output this year, thanks to a hangover from late-2020 drought, with the broker cutting its harvest forecast by 2m bags to 33m bags.
With 20m bags of robusta coffee expected, that would take the country’s total output in 2021-22 to 53m bags – the same as just the arabica harvest last year, on Sucden estimates.
Separately, Commerzbank noted on Wednesday that “many forecasts of a [Brazilian] arabica crop of below 30m bags have now been issued, the lowest since 2007-08.
“Some observers are therefore raising their deficit expectations for 2021-22, in some cases to over 10m bags – albeit following surpluses in 2019-20 and in the current 2020-21 season.”