Coffee rally fades amid talk of 'excessive' gains

The rally in arabica coffee futures showed signs of tiring amid talk that the surge of some 50% in prices this year appeared "excessive", given that buyers look set to be able to find supplies despite Brazil's drought.

Coffee futures for May rose to 177.50 cents a pound in early deals in New York – the highest for a nearest-but-one contract in 16 months, and up 57% so far this year.

However, they had eased back to 165.90 cents a pound by 07:20 New York time (12:20 UK time), down 3.9% on the day, amid concerns from some observers that investors had overreacted to the threat from Brazilian dryness which has fuelled the rally.

A near-two-month dry spell in Brazil has affected in particular Minas Gerais, the top coffee-producing state.

'Significantly lower yields'

Meteorologists at Brazil-based Somar said on Thursday that a cold front would this weekend bring some rains to Parana, parts of Sao Paulo, the key cane and orange-growing state.

However, southern Minas Gerais looked like having a chance of only "isolated showers". And while central areas may receive rains next week, the important eastern Mata part of the state looked like remaining dry.

This after a period when rains, up to February 19, have come in at less than 20% of average full-month levels, following dryness in January and, in some areas, December too.

"The persistent drought will result in significantly lower yields than had been assumed just a few months ago," Commerzbank said.

'Appears excessive'

However, while the bank said that the estimates for a 60m-bag Brazilian coffee crop "are no longer tenable", with many estimates at 50m-52m bags, "we are still a long way from any tightness of supply thanks to the very good crops of recent years.

"The scale of the price rise in recent weeks appears excessive," Commerzbank said, adding that "we expect prices to fall during the course of the year".

Separately, Macquarie acknowledged that Brazil's "weather situation is unprecedented and it is difficult to assess how much damage has been done to the coffee crop.

"But at current high levels, we believe coffee prices look overbought," the bank added.

"Even allowing for Brazilian crop losses, we still don't see a market in deficit," and with some rains on the horizon "we would expect prices to consolidate, as further [crop] losses are stemmed".

'Prices may have to stay lower'

Macquarie also restated ideas of lower prices ahead for sugar, which has also rallied on fears over drought in Brazil, the top producer and exporter of both the sweetener and arabica coffee beans.

While still monitoring the Brazilian situation for "any adverse impact" on cane crops, the bank flagged the fourth successive production surplus expected for the 2013-14 season, ending next month.

"As such, to encourage greater offtake, prices may have to stay lower for longer."

Raw sugar for March stood 0.5% lower at 16.38 cents a pound.