Coffee market may have overreacted to Brazil frost scare – Rabobank

The frost scare in Brazil, which fuelled a rise in arabica coffee prices to a one-year high, was overdone, leaving the market vulnerable to selling, Rabobank said.

Front month arabica futures rallied to a high of 140.75 cents per pound in New York last week, having averaged 123.7 cents per pound over the last 12 months, as markets digested news of fold temperatures in some growing areas in Brazil, the top coffee producing country.

However, while the bank nudged “marginally” higher its forecasts for arabica coffee futures, by up to 2 cents a pound, to “account for some minor quality damage” from adverse conditions, it left its projections well below the futures curve.

It forecast, for instance, an average price of 129 cents a pound for the April-to-June quarter next year, compared well below the 146.95 cents a pound at which July 2017 futures were trading on Wednesday.

Not over yet

“We believe that if there was any frost damage at all, it is confined to some regions of Sao Paulo, and possibly in some valleys and corridors in the south of Minas and Parana that are known to be prone to frost,” the bank said.

“From what we hear, the frost should not have reached more than 2-3% of all arabica trees.”

However, the bank acknowledged that low temperatures remain a potential threat until early September.

Until mid-August, when the prospect of any late freeze should be in the weather outlook, “we should expect any lowering of temperatures to attract fund attention”.

‘Constant support’

The bank was also downbeat on prospects for robusta coffee prices, despite restating a forecast of a “very steep” global production deficit of 4.6m bags of the variety in 2016-17, reflecting dryness setbacks in major growing countries such as Vietnam, besides Espirito Santo state in Brazil.

“The fact that Brazil may have another very low robusta crop in 2017-18 should prove constant support for the market,” the bank said.

However, while lifting its forecasts for robusta coffee futures in the July-to-September period by $40 a tonne to $1,640 a tonne, and for the follow quarter by $20 a tonne to $1,600 a tonne, its estimate remained below the futures curve.

January 2017 futures, for instance, closed in London at $1,734 a tonne.

The spot July 2016 contract ended down 0.5% at $1,683 a tonne.