Coffee rally may be about to run out of steam

Coffee prices may be able to build on the rally which has seen them rebound nearly 15% in less than two weeks – but it will take further crop setbacks to do it.

Futures in coffee deserve prices higher than historical levels, given that stocks are expected to end 2011-12 at "very thin" levels, in what is an "off" year in the Brazilian cycle of higher and lower production seasons, Rabobank said.

Indeed, it is likely that prices will remain high for the rest of the season, given the "need to encourage farmers to boost output", and take some account for production risk.

But that does not justify arabica futures’ pick-up back above 265 cents a pound on Friday, for New York’s near-term September contract, from 231.35 cents a pound reached on August 8.

Robusta beans, as traded in London, have staged a similar revival.

‘Short-term rally’

"Fundamentally, little has changed in the coffee markets to warrant the current price rises," Rabobank analysts said.

The rally was, while supported by "strong" consumer buying, in fact, a "short-term" phenomenon, which was likely to peter out, depressed by better supplies from Brazil, the top arabica producer, and Vietnam, the top grower of robusta beans.

"We expected end-user buying to dry up near the 270 cents-a-pound level for arabicas, and a better supply of arabica from Central America and Colombia to temper the current price rally."

However, with supplies "razor thin", the bank acknowledged "extreme upside risk" to prices if crops suffered setbacks.

"This high risk is amplified by the short position of funds, who would likely quickly reverse tactics and buy if output was threatened."

‘Black frosts’

The comments come amid further doubts over the Colombian harvest, which was hit by heavy rains during the flowering period, and may now be on track for another disappointing season in the 2010-11 marketing year, which ends next month.

The Brazilian crop has been the centre of concerns over frost, although it does not appear that cold weather this month has caused serious harm.

That said, it can be many months before frost damage is picked up veteran soft commodities analyst Judith Ganes-Chase, who has portrayed a more bullish scenario for prices, said earlier this week.

"There have been time when a frost occurred in late August or September but the damage was not immediately visible," she said.

The impact of these so-called "black frosts" only becomes apparent ar harvest, "and within the bean cherry, the bean itself hasn’t developed well or uniformly, and could be black".

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