Coffee price rally 'may not last long'

Investors were warned against expecting a continued recovery in coffee prices, even as robusta beans strengthened their foothold back over $1,600 a tonne, while arabica futures sought their first three-day winning streak since early October.

Commerzbank said that the "restraint" exercised by robusta coffee sellers in Vietnam, the top producer of the variety, may continue to support London-traded futures in the short term.

Vietnam's exports fell 34% to 61,100 tonnes in October, the first month of the 2013-14 crop year, below an initial forecast of 65,000 tonnes, the country's official statistics office said on Wednesday, driving futures up 2.4%.

"Estimates for November [exports] are likewise well below their year-on-year equivalents," the bank said.

The declines defy an ongoing harvest which looks like ending up at a record 1.7m bags, and would be expected to weigh on prices.

'We anticipate a correction'

"It is likely that the short-term-oriented financial investors active on the market will further cut their net short positions," giving extra support to futures for now, Commerzbank said.

Speculators in robusta coffee cut their net short position – the extent to which short bets, which profit when values fall, exceed long holdings, which benefit when prices rise – by 2,302 lots to 8.490 lots in the week to November 19.

However, the extent of Vietnam's harvest will weaken the discipline among robusta sellers, boosting exports and undermining prices.

"We remain sceptical about whether Vietnam will continue to be able to withhold exports for any prolonged period," the bank said.

"We anticipate a correction in the foreseeable future, assuming the prospect of a record crop does not change."

SocGen outlook

Separately, Societe Generale downgraded its forecast for arabica coffee futures to levels below the futures curve, albeit not foreseeing any lasting drop below 100 cents a pound for the first time since 2006, as some other commentators such as Macquarie have done.

With Colombia's output recovering strongly, as trees mature which were put in during a campaign to replant with varieties resistant to coffee rust, and Brazil set in 2014 for an "on" year in its cycle of higher and lower producing years, these extra supplies "will only add to the global surplus", SocGen analyst Christopher Narayanan said.

The bank raised by 1.2m bags to 5.6m bags its forecast for the world production surplus in 2013-14, raising its estimate too for the surplus last season, by more than 900,000 bags to 10.9m bags.

"We maintain that tightening will not be seen until at least the 2015-16 marketing year, barring any significant drop in Central American coffee production due to leaf rust disease," Mr Narayanan said.