Arabica coffee futures “may have further to fall”, Fitch Solutions warned, even as prices hit their lowest in 16 months, but restated a forecast for prices to stage some recovery in 2023.

The analysis group stood by a forecast that New York arabica prices will average 215 cents a pound over 2022, which would make it the most expensive year for buyers in 11 years.

However, that forecast – which is 5 cents above the market consensus, according to a Bloomberg poll – factors in scope for continued weakness this year, given that prices averaged above that level over the first three-quarters of this year.

The current second contract, for March, stood on Friday at 157.30 cents a pound, rebounding by 0.6% from a close to the last session which was the lowest since July 2021.

‘High expectations’

Nonetheless, prices “may have further to fall as global demand softens” in the face of the world economic downturn “and supply conditions in Brazil improve”, Fitch said.

Many investors have focused on the prospect of a strong 2023 Brazilian arabica harvest, after a rain-blessed blossoming period in the key growing state of Mato Grosso.

Research institute Cepea this week reported that “with frequent rains in arabica-producing regions, crops’ development has been positive, and farmers have high expectations for the coming season, 2023-24,” despite it being an “off” year in Brazil’s cycle of alternate higher and lower producing years.

Stocks surge

However, Fitch flagged too that “the current weakness of the Brazilian real and the Colombian peso will continue to encourage US dollar-denominated export sales”, fuelling the rebound in Ice exchange stocks certified for delivery against arabica futures.

Inventories on Wednesday reached 485,369 bags – up by more than 100,000 bags from the 23-year low of 382,695 bags set two weeks before, driven by a 31% jump to 432,411 bags in Brazilian arabica beans.

This surge in stocks is “a sign of a potential nascent supply-demand imbalance as coffee demand as a shipping hold-up at ports along the US West Coast eases and harvests ramp up in Colombia and across Central America”, Fitch said.

‘Weightier downside risks’

The group too held its forecast for average 2023 arabica prices above the futures curve, at 190 cents a pound, despite saying that there were now “weightier downside risks” to the forecast.

“Our [economic] growth outlook for several major coffee consuming markets, such as the EU, has weakened,” Fitch said, implying a weakened demand profile.

“We highlight too that arabica coffee prices, despite recent losses, remain elevated in recent historical terms.”

In the three years to 2020, prices averaged 111 cents a pound.

Fund selling

The group noted too that hedge funds have been taking out short bets in arabica futures and options, “seeing a swing from a net long position in October to a net short position”, fuelled by the largest selldown on record in the week to October 18.

Their net short of 14,163 lots as of November 8, the latest figure available, was the largest in more than two years.

Nonetheless, Fitch’s forecast for a price recovery next year tallies with the outlook of Rabobank, which said it was “bullish coffee” from current levels, viewing 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”, said Carlos Mera, the bank’s head of agri commodities market research.