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Are analysts too downbeat on coffee market prospects?

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While the recent rally is coffee prices may prove overdone, but many analysts seem to be overly bearish, given the looming coffee market deficit.

Sentiment among market watchers remains downbeat on coffee prices with the consensus of major analyst forecasts currently pegged at around 11% below the forward curve for both arabica and robusta coffee for the rest of the year.

But given the rapidly approaching prospect of a market tightening, these forecasts seem over-cautious.

Expectations are growing for lower global inventories and a tighter supply balance in the 2016/17 season.

Data from Brazil's ministry of Agriculture show aggregated publicly and privately held stocks well below 2014 levels at 15.8m bags compared with 16.9m bags in 2014 and 15.94m bags in 2015.

Consultant J. Ganes also reports elevated risks to prices on account of low inventories in Brazil compared to prior years.

Frost fears fuel price rally

The gap between analyst views, and the current markets has opened up in recent weeks, after a rally in arabica prices, fuelled largely by adverse weather reports.

Brazilian weather forecasters Somar are forecasting risks of frost in coffee growing areas particularly in the South and South Eastern States of Parana and Sao Paolo.

Market moves have been pronounced in the arabica market with the front month forward contract in New York now trading at around 137 cents a pound, up 4% compared to prices at the start of the week.

The rally in arabica prices has buoyed the entire complex with the front month robusta forward also trading nearly 3% higher compared to its level on Monday.

Arabica prices have been disproportionately impacted by the news on account of supply risks to Brazil's output.

Brazil accounts for a mammoth share of global arabica output, contributing around 75% of production. However, Parana and Sao Paolo are not major robusta producing states.

Weather may not be sufficient justification for price rally

But although analysts may be over cautious in their price outlook, that does not mean the scale of the recent rally is justified.

Parana accounts for a small proportion of Brazil's total coffee output and less than 3% of its total exports, while Sao Paolo, which is a much larger coffee state, is likely to be spared the worst of the weather.

And coffee harvesting across Brazil is progressing at a brisk pace, up 28% year on year according to researchers Safras.

Consultants I. and M. Smith believes prospects for widespread killing frost conditions on the new coffee crop are limited.

By Abah Ofon

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