The rebound in arabica coffee prices could be about to run out of steam, weighed by Brazil’s huge harvest, ABN Amro and Rabobank said – although with the latter taking a less downbeat view, thanks in part to demand hopes.
The recovery which has taken New York arabica coffee futures to highs of 128.90 cents a pound earlier this month, from June lows of 94.55 cents a pound on a second-contract basis, “is only temporary”, ABN Amro said.
The bank acknowledged the decline in arabica stocks certified for delivery against New York futures - which shrank by a further 8,564 bags on Wednesday to a fresh multi-year low of 1.35m bags, down one-third so far this year – which has been seen as a key support for values.
Nonetheless, “the availability of coffee remains good for the time being”, ABN said, noting Brazil’s record harvest this year, and the hit to demand in venues such as cafés and restaurants from Covid-19 factors.
“As long as there is no vaccine for Covid-19, the growth potential of coffee demand will remain relatively low.”
The bank added that “we think this revival is only temporary”, forecasting year-end arabica futures prices of 11 cents a pound, some 10 cents below the level that the March 2021 contract was factoring in on Thursday.
‘Risk of a trickle becoming a river’
Rabobank too sounded some caution over prices, citing the boost to output of Brazilian semi-washed arabica beans amid the country’s record harvest and which may start rebuilding exchange inventories.
“Some roasters will be reluctant to adopt semi-washed [beans] – in part because they are not available every year – so the exchange may be the final destination for some volumes until enough roasters adapt,” Rabobank analyst Carlos Mera said.
“The possibility of a trickle becoming a river should limit the price upside to 125 cents a pound in the December contract,” compared with a price on Thursday of 119.25 cents a pound.
‘Allows for some price hikes’
Still, Rabobank said too that the “contrast between overwhelming production in Brazil and the decline in washed coffee production has never been sharper, and it allows for some price hikes”, despite the extent of Brazil’s crop.
The bank pegged Brazilian 2020 coffee production at 67.5m bags overall, a rise of 8.5m bags year on year, and 5.0m bags above the previous record, set in 2018.
Output from Honduras, by contrast – a key origin of washed arabicas placed in exchange stocks – was seen down 14% in 2019-20.
Furthermore, the bank was relatively upbeat on demand, saying that while it fallen in the April-to-June period thanks to the pandemic, the decline was “not dramatic”.
Results from listed coffee companies were in fact “rather encouraging”, showing that the out-of-home sector was “not the bloodbath it could have been, with very positive forward guidance across major chains”.
While raising by 1.0m bags, to 3.6m bags, its forecast for the world coffee surplus in 2019-20, Rabobank trimmed by 600,000 bags, to 7.0m bags, its estimate of the surplus next season, largely thanks to improved demand expectations.
Cocoa, sugar outlooks
ABN’s comments came as it took a downbeat view on price outlooks for cocoa and sugar too, thanks largely to demand destruction caused by Covid-19.
For cocoa, the bank said that a price recovery which has taken New York futures some 16% above July lows “will not last long”, senior economist agricultural commodities Casper Burgering said.
“The demand for cocoa is still far from its previous level and stocks are relatively high,” with the outlook for supplies “positive” too given dent West African harvest prospects for 2020-21.
For sugar, the bank highlighted pressure on values thanks to switch by producers, particularly in Brazil, to processing more cane into the sweetener rather than ethanol, in the face of weakened fuel prices.
Still, “upward price risks have increased,” Mr Burgering said, viewing that weakened output expectations for Thailand, Russia and the EU “can offset higher output from Brazil”.
ABN Amro last week announced a retreat from many commodity sectors, notably trade financing worldwide, but retains natural resources financing operations in Europe.