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Arabica coffee futures - will their rout end in 2016?

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Coffee futures proved among the worst ag performers of 2015 – in particular New York-traded arabica ones which dropped by 24%, compared with the 21% decline in their London-listed robusta peer.

The drop to a large part reflected the decline in currencies in major producers Brazil and Colombia, cutting the value in dollar terms of a commodity in which they represent a large chunk of world supplies.

However, better weather in Brazil's main arabica-growing state, after a dryness-plagued 2014, and the continued recovery in Colombian output after a replanting programme early in the decade also played a role.

As did continued strong coffee exports from Brazil, which questioned lowball ideas for the country's inventories.

But will Brazil's stocks, and export supplies, finally run low in 2016, putting a prop under prices? Or will continued emerging market currency pressure keep futures under pressure?

Expert commentators give their opinions.

ABN Amro

"In the coming months, new data about the Brazilian harvest will largely determine the direction of prices.

"Global demand for coffee beans has soared more than 40% in the past 15 years, while production only grew by 25% in the same period, according to International Coffee Organization statistics.

"The resulting decline in stock levels means that annual output fluctuations are having a major impact on prices.

"Besides the output expectations for Brazilian coffee, attention is also focusing on production in Vietnam, Indonesia and Colombia. Robusta is the main

"Output in Colombia, the second-largest producer of arabica beans, has actually been growing for a number of years, reaping the rewards of the regeneration programme.

"All in all, in view of the weather conditions together with tight stock levels, we foresee a slight increase in prices in the coming months.

"The upward potential is limited, however, as any rally is likely to be just further short covering as commodities as a whole remain out of fashion and supressed by dollar strength."

Citigroup

"Weaker Latin American producer currencies can feed through to coffee prices through multiple channels including: buttressing producer margins upstream; impacting planting rotation; and boosting crop export volumes. Array

Q1 2016: 130 cents a pound

Q2 2016: 130 cents a pound

Q3 2016: 135 cents a pound

Q4 2016: 135 cents a pound

Forecasts for front New York contract, quarter average basis

"To be sure, we anticipate only modest follow-on weakness to coffee prices from current levels given the already steep sell-off in 2015. Though further dollar strength is expected as we enter Fed lift-off, we are unlikely to see depreciation in the Brazilian real and Colombian peso the same scale and pace seen in 2015.

"With potentially moderating currency headwinds, coffee prices could begin stabilising in 2016.

"The market could be further supported as weak cash prices start eating into the cost curve for marginal producers in Central America and as Brazilian stocks have tightened amid a strong 2014 and 2015 export programme."

Commerzbank

"All in all, coffee supply is by no means plentiful. Another market deficit is anticipated in 2015-16, whereby the range of estimates is large. Approximately 2.5m bags are expected on average.

Array

Q1 2016: 130 cents a pound

Q2 2016: 120 cents a pound

Q3 2016: 110 cents a pound

Q4 2016: 110 cents a pound

Forecasts for front New York contract, quarter average basis

"We expect the deficits on the coffee market and low arabica stocks to be more strongly reflected in the price trend in the coming quarters.

"Only when it is foreseeable that the optimistic case of a good Brazilian crop is materialising do we expect prices to retreat again.

"That said, the further massive depreciation of the Brazilian real over the year expected by our foreign exchange analysts should weigh heavily on the arabica price."

Goldman Sachs

"After rallying close to 135 cents a pound in mid-October, on the back of a Conab production [Brazilian] forecast cut to 42.15m bags in 2015-16, prices have declined to a new two-year low across the curve.

"We see three key factors behind this move: Colombia has lowered minimum export quality standards in response to concerns of lower production on the back of El Niño; after concerns about a lack of moisture in Brazil, rains have returned; and with the first US rate hike now behind us, key producers are likely to see renewed pressure on exchange rates.

"There is still wide divergence on production estimates for 2015-16, and with the possibility of more visible El Niño conditions over the coming winter 2016-17 yields remain uncertain.

"Accordingly, we believe that prices are likely to remain volatile for some time to come. Yet under prevailing weather conditions we continue to see the cost deflation trend [spurred by emerging market currency weakness] outweighing yield concerns."

Rabobank

"Coffee futures in 2016 will remain under pressure from currency weakness in producer countries. Array

Q1 2016: 131 cents a pound

Q2 2016: 128 cents a pound

Q3 2016: 123 cents a pound

Q4 2016: 122 cents a pound

Forecasts for front New York contract, quarter average basis

"However, we still believe fundamental bullishness – cemented in a steep deficit of 6.1m bags in 2014-15 and a further deficit of 2.7m bags in 2015-16 – will surface once Brazilian exports run out of steam, which considering low carry-in into this season could take place in early 2016.

"Furthermore, the bullish sentiment will be reinforced if crop tours around Brazil's coffee regions in January and February show that 60m bags will not be reached in 2016-17, which we believe is the most likely scenario."

Societe Generale

"We expect demand to continue improving and help to remove coffee from global inventories in the near-to-medium term, in turn helping to support prices, assuming that no further significant economic shocks hit global markets. Array

Q1 2016: 128.58 cents a pound

Q2 2016: 128.59 cents a pound

Q3 2016: 131.17 cents a pound

Q4 2016: 129.67 cents a pound

Forecasts for front New York contract, quarter average basis

"The El Niño conditions that are currently present could still lead to decreased production and higher prices in the coming months, and this rally could continue into 2017."

By Agrimoney.com

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