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Rabobank lifts coffee price hopes, citing pest damage in Brazil

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Rabobank raised its forecast for arabica coffee prices, as it cut its forecast for the Brazilian crop to well below expectations from some other analysts, citing pest damage.


The bank, following a 5,000km crop tour in Brazil’s coffee heartland, lowered by 2.2m bags to 56.8m bags its forecast for the country’s harvest of the bean this year.


While still a record high, the forecast is below expectations of up to 65m bags expected by some other commentators, with a Reuters poll of investors a month ago putting the consensus forecast at 60m bags, and an estimate from exporter Terra Forte since putting the crop at 59.15m bags.


Indeed, Rabobank acknowledged that its estimate stood “in sharp contrast to the average market expectation of a greater-than-60m bag crop, prevalent until early 2018”.


‘Lower cherry load’


The bank cited reductions to its forecasts for both arabica and robusta harvests, with the former lowered to 41.0m bags – falling 1.0m bags short, indeed, of the record crop reached in 2016, the last time Brazil encountered an “on” year in its cycle of alternate higher and lower producing years.


While seeing “surprisingly high” arabica output in some areas, Rabobank senior commodity analyst Carlos Mera said that the “largest surprise came from the south of Minas Gerais”, the top arabica-growing state, “where we observed a lower [coffee] cherry load than last year”.


Mr Mera also flagged the presence of some cercospora, a fungal infection, “across arabica regions”, an outcome attributed in part to a dearth of rains, which hampered nitrogen uptake and so compromised plant vitality.


“Anything between Varginha and Guaxupe” in south west Minas Gerais, “was the opposite of what we were expecting – and that is the heart and soul of the arabica coffee belt”.


Mealybug losses


For robusta coffee, Rabobank cut its forecast for Brazilian output this year to 10.7m bags, curtailing the extent of the expected recovery from the 8.1m bags recorded last year, when trees in the key growing state of Espirito Santo suffered a second successive year of drought.


“Even though we had expectations for a very good crop in Espirito Santo, the reality was quite different,” Mr Mera said, flagging the spread of mealybug insect pests encouraged by dry weather.


“Almost half of the surveyed farms in Espirito Santo were affected by it, and the average loss in these farms was almost 30%.”


“Constant rainfall is needed to prevent further expansion [of affected area] before the harvest.”


Price forecast upgrade


Brazil’s coffee crop looks like ending up “lower than the market expects” with much of what is harvested in the hands of larger and well-financed farmers facing less pressure to sell.


And, noting that the country faces an off-season crop in 2019, Rabobabnk raised by 6 cents to 133 cents a pound its forecast for arabica coffee futures in the July-to-September quarter of this year.


That is above the 125.10 cents a pound the market was factoring in on Monday into the September contract, and was indeed a level that the futures curve does not see being reached until around April next year.

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