Goldman lifts coffee price hopes, but wary on ags

Goldman Sachs raised its forecast for coffee prices, thanks to a Brazilian drought deemed by Cooxupe as turning beans into "bubble wrap", but the bank remained downbeat on prospects for agricultural commodity prices.

Goldman Sachs raised by 10 cents a pound its forecast for New York coffee futures, citing the "hot and dry weather conditions" in major growing areas in Brazil, the top producer of the bean.

"These weather conditions are expected to impact the 2014 arabica coffee crop, which was up to now expected to be record large," the bank said.

Indeed, the comments came amid continued reports from Brazil of crop losses, including in Espirito Santo, Brazil's main area for growing robusta coffee beans, which was thought to be relatively resistant to dryness because of more widespread irrigation than other areas.

However, according to state research institute Incaper, producers are expecting losses of some 20% on a crop originally forecast at 12m-12.5m bags.

'Resemble bubble wrap'

In Minas Gerais, Brazil's main coffee growing state, many newer planted trees have failed completely, according to Lucio Dias, commercial superintendent at Brazil-based Cooxupe, the world's largest coffee co-operative.

"Older crops are still holding on, but smaller ones are suffering a lot," Mr Dias said.

"The grains resemble bubble wrap, because there is only air inside."

"We are seeing a lot of empty grains, beans and many voids," he said, warning that the impact of the dryness would likely be felt in 2015 too, given that branches on which next year's flowers will bud are already growing.

"This drought is unprecedented - we have never had it as dry in January and February as we are having now," with limited knowledge of the impact of poor weather at this time of year.

For producers, "the consequences may be worse than they are anticipating".

Soybean recommendation

Nonetheless, Goldman Sachs left its forecast for corn prices, at 130 cents a pound on three, six and 12-month horizons, below the futures curve.

"High stock levels after several years of surpluses will help cushion this production shortfall," the bank said, adding that a one-off short-covering drive by speculators had likely boosted the revival in prices, which have risen by 27% so far this year on the Ice futures market.

Indeed, although the bank acknowledged that risks to its coffee futures forecasts were "skewed to the upside", it remained downbeat on crop prices overall, foreseeing a 9.0% fall over the next year.

It retained a short recommendation on both old crop soybeans and Chicago's new crop December corn contract, foreseeing prices of the oilseed standing at $9.50 a bushel in a year's time, a level not seen since July 2010.

Concerns over emerging market economies only underlined the prospect of soybean price falls, the bank said.

Hog hopes

Goldman's forecasts for wheat, cotton and cocoa futures were left below the futures curve too, with the bank warning over the fibre that "the outperformance of prices relative to corn prices will likely support acreage and production in 2014-15, which will bring inventories higher in 2014", so weighing on prices.

However, the bank forecast livestock prices holding their ground over the next 12 months, cautioning that its ideas of Chicago lean hog futures standing at 80 cents a pound in a year's time, after hitting 100 cents a pound in the late summer, may prove pessimistic.

A rally in summer lean hog futures lots this year, attributed largely to fears over the growing extent of US losses to porcine epidemic diahorrea virus (PEDv), "has taken prices slightly above our price forecast".

"The elevated uncertainty around the severity and impact of the PED virus leaves risk to our forecasts skewed to the upside," the bank said, also highlighting talk that Russia may this spring lift a ban on imports of US pork, imposed over the use in America of growth promoting drugs.