Investors have overegged selling in coffee, but have significantly more to do in sugar, Rabobank said, even as it forecast improved production of both agricultural commodities.

The major agricultural lender forecast prices of both contracts easing over 2023, as Brazilian output of both coffee and sugar grows, in a year marked by economic downturn.

However, for coffee – which investors have already sold down, largely on expectations for an improved Brazilian harvest, while recession crimps consumption – “some price recovery is likely”, at least short-term, the bank said.

Arabica coffee futures proved the second-worst performer among major agricultural commodities last month – outpacing only cotton – and have fallen further since to its lowest levels since July last year.

Robusta coffee, the third-worst performer, has also retreated to 15-month lows.

‘Bullish coffee’

Rabobank was “bullish coffee” from current levels, said Carlos Mera, the bank’s head of agri commodities market research, saying that coffee’s loosened supply and demand outlook “has been offset by the price”.

While “we are looking at much lower growth” in demand, “the market has been dropping a lot in recent weeks”, he told reporters.

The bank forecast arabica coffee prices averaging 178 cents a pound in the first three months of 2023, roughly 15% above the futures curve on a second-contract basis, before easing back to 163 cents a pound in the fourth quarter

For London robusta futures, Rabobank forecast values averaging $1,850 per tonne in the January-to-March period of 2023 – and then appreciating to $1,900 per tonne by the October-to-December quarter.

Back to surplus

The forecasts factored in expectations of a world coffee production surplus of 4.1m bags in 2023-24, with the turnaround from this season’s 400,000-bag deficit driven by a “decent recovery” in Brazilian arabica output.

“A good return of the rainy weather has led to a widespread wave of flowering across the Brazilian arabica belt,” the bank said, foreseeing a 1m-bag improvement in Colombian output too from levels expected to be depressed by La Nina-spurred rains to 12.1m bags this season.

Demand growth will slow to 1.5% this season, below the average rate of 2.3%, which the bank pencilled in for 2023-24.

‘Lower prices ahead’

For sugar, meanwhile, the bank forecast a world production surplus of 4.4m tonnes in 2022-23, double that of last season, and factoring in expectations of a strong Brazilian cane harvest, as will start around April 2023.

“Brazilian cane volumes should recover in the 2023 harvest, given that rainfall in 2022 so far as been significantly better than in 2021.”

Furthermore, ethanol’s competition for cane will be lower, with prices of the biofuel to “remain subdued”, prompting mills to turn a relatively large amount of crop into sugar, and overall “adding 3m-4m tonnes” to Brazilian output of the sweetener.

The “likely recovery in Brazil should result in lower [sugar] prices ahead”, the bank said, foreseeing some revival in Thai output too.

New York raw sugar futures were seen falling back to 16.3 cents a pound as of the last three months of 2023, well below the 17.71 cents a pound being factored into the March 2024 contract on Thursday.

For more on Rabobank’s ag price outlook for 2023, click here.

For grain and oilseed price forecasts, click here.

For the live cattle and lean hog price outlook, click here.