(Agrimoney) – Commerzbank said it was upbeat on prospects for cocoa, coffee and sugar futures, despite cutting its price forecasts, warning that “supply may not be able to keep up with demand” for all of these soft commodities.
The bank – which earlier this month unveiled reduced price projections for futures in New York-traded arabica coffee and raw sugar, and in London-listed cocoa and robusta beans – on Tuesday cut its forecast for sugar again.
Commerzbank – which two weeks ago cut its year-end forecast for raw sugar prices from 20.0 cents a pound to 18.0 cents a pound – reduced it to 17.0 cents a pound, noting “renewed devaluation” by Brazil’s currency.
A weaker real reduces the value, in dollar terms, of assets in which Brazil is a major player.
‘Higher prices are needed’
However, even a price of 17.0 cents a pound as an average for the October-to-December quarter is more than being factored in by investors, who were on Tuesday pricing October sugar at 15.25 cents a pound, and March 2016 supplies at 16.12 cents a pound.
Commerzbank note “rather cautious” outlooks for production in 2015-16 in the likes of India and the European Union, besides the prospect in Brazil of unchanged sugar cane output and greater competition for the crop from ethanol, thanks to a raised blending mandate.
“The sugar price has upside potential over the next few months,” the bank said.
“The view that somewhat higher prices are needed if sugar production were to keep pace with demand again, at least in the medium term, is likely to prevail,” or prompt a drop in production from a cash-strapped industry.
Without higher prices, “the tight financial situation reported by sugar mills not only from Brazil but also from India, China and other countries should result in a massive reduction of supply”.
‘Massive insect infestations’
For arabica coffee, the bank – which two weeks ago cut its forecast for average prices in the an average for the October-to-December quarter by 30 cents a pound to 200 cents a pound – underlined the likelihood of another weak Brazilian harvest, at a time when the drought-reduced 2014 crop had already led to a run down on inventories.
In Brazil’s coffee belt, “conditions have again been much too dry since December – even in January which traditionally is the rainiest month of the year”.
And prospects for Brazil’s robusta coffee output are being undermined by “massive insect infestations” in the main growing area.
“The outlook of another unsatisfactory coffee harvest in Brazil amid much lower inventories as a result of strong exports, we are looking for coffee prices to climb over the next few quarters,” the bank said.
However, while its forecast for arabica futures is well above the futures curve, an estimate that robusta coffee futures will average $2,100 a tonne in the October-to-December quarter is in line with the level that investors are already factoring in.
‘Upside potential’
For cocoa, Commerzbank cited the set of weak Asian, European and North American grinding data for a downgrade two weeks ago by £150 a tonne to £2,050 a tonne its forecast for London futures in the fourth quarter of 2015.
Nonetheless, with December futures trading on Tuesday at £1,929 a tonne, there is “upside potential” for prices.
The bank highlighted the threat from a strong version of the Harmattan winds – which blow hot and dry air from the Sahara into West Africa, reducing crop hopes in Ivory Coast and Ghana, the top-two cocoa growing regions.
“In many regions of Ivory Coast and Ghana, expectations are that the mid-crop will turn out much weaker than in the previous year,” with the Ivory Coast government foreseeing a drop of 20% in the smaller, mid-crop harvest.
The comments follow a caution from Sunny Verghese over the potential damage to production prospects from the Harmattan, as the chief executive of commodities trader Olam International also forecast rises in cocoa, and coffee, prices.
