Lower Brazil coffee ideas 'may not be so bullish'

The lower coffee harvest estimates for Brazil, which have prompted a surprise revival in arabica futures prices, may not be quite so bullish after all, a leading analyst said, saying a production uptick may have only been delayed.

New York arabica coffee futures, which many analysts expected to drop below 100 cents a pound this year, have instead proved a surprise gainer, touching a four-month high of 122.60 cents a pound last week for March delivery.

While the contract has eased back since to standard at 117.20 cents a pound in morning deals on Wednesday, down 1.7% on the day, it remains some 6% higher in 2014 so far.

The improvement reflects sharply reduced expectations for Brazil's coffee harvest, the world's biggest, this year to levels well below the 60m bags or more that some forecasters have pencilled in.

Conab, the official Brazilian crop bureau, last week pegged output at 46.53m-50.15m bags, while Swiss-based coffee trader Volcafe has estimated the harvest at 51m bags, citing tree stress, and a programme of heavy tree pruning farmers have undertaken to boost future productivity while prices are low.

'Not running out of coffee'

However, respected soft commodities analyst Judith Ganes Chase - while acknowledging that investors may have underestimated the threats to Brazilian coffee output from frost and tree stress after "back-to-back bumper crops" – cautioned against overplaying the lower production estimates.

"Other crop view are not nearly as low, and still place the crop between 53m-55m bags," she said.

"It's not a bumper crop, but sufficient to cover market needs.

"The world is certainly not running out of coffee, and will remain well supplied."

'Creates a new worry'

Furthermore, the heavy tree pruning may be sowing the seeds for weaker prices ahead, in boosting yield potential for future crops.

"It will give the trees the chance to recover, and now creates a new worry," she said.

"In two years from now, Brazil could have the potential to see output expand as the pruned trees start to produce fruit again."

The comments raise concerns that growers, having taken something of a harvest holiday this year, may face low prices when their trees return to productive use.

A drop in coffee prices below the cost of production has been a major concern for coffee producing countries such as Brazil and Colombia, for which the crop is a major earner for rural economies.