Coffee to see 'protracted' bull run, record prices

The arabica coffee market is on course for a "protracted bull market" that could drive futures to record highs, Citigroup said, at the close of a day when further talk of Brazilian crop damage sent futures soaring 7%.

Citigroup cut to 41.75m bags, from 44.25m bags, its forecast for this year's coffee output in Brazil, the top producing country, citing drought which, according to its sources, has caused crop losses of typically some 20-30%.

"Some smaller producers are seeing only 10% losses, but other are seeing 35-40%," Citigroup futures specialist Sterling Smith told Agrimoney.com.

The figure compares with the 57.3m-tonne crop Brazil had been set for, before drought set in late in 2013, a period typically marked by rains in the country's central coffee and sugar belt.

Next year to prove worse still

And the hangover from drought looks set to leave Brazil with a smaller harvest next year.

Besides being an "off" year in Brazil's cycle of higher and lower production years, 2015's output potential is being hampered by the lack of vegetative growth needed to bear coffee flowers, and cherries, for the crop.

Furthermore, "we are now seeing premature flowering on a large area," he said.

"Flowering at this time of year is not going to work," with dry weather ahead causing flowers to drop and "taking reproductive energy away.

"Next year's crop should inherently be smaller than the current crop. A sub 40m-bag crop for the 2015-16 year seems unavoidable at this point."

'Record prices'

The impact on prices will be to "a protracted bull market that can readily test the 300 cents-a-pound level eventually and quite possibly the 400 cents-a-pound level over the next 24 months".

New York arabica coffee futures last stood above 300 cents a pound in May 2011, but have never come close to 400 cents a pound.

"It is hard to make up production." Coffee, as a crop grown on trees requiring many years to mature, "is not like corn or soybeans".

"If we see a sub-standard Brazilian crop next year, I think it is unavoidable" that prices will head significantly higher.

Futures soar

The comments came at the close of a day when New York arabica coffee futures for September closed up 6.8% at 195.05 cents a pound, a two-month closing high for a spot contract.

The contract also closed above its 75-day, and 100-day, moving averages for the first time in two months.

The gains followed the downgrade by coffee exporter Terra Forte last night of its estimate for Brazil's coffee production by 1.6m bags to 45.8m bags.

"Terra Forest is pretty well respected in Brazil," Price Futures analyst Jack Scoville told Agrimoney.com.

However, he added that "what really triggered the whole start of the latest price rise" was the INTL FCStone report last week which, at a time of mixed reports on Brazil's output, tilted the market squarely towards the idea of a disappointing crop.

Speculators vs trade

The higher prices were attracting some "pretty good selling by Brazilian producers", Mr Scoville said.

However, Central American producers appeared less keen to price their crop, while roasters were buying.

"It is not just speculators driving the market up," he said.