London, May 7 - Investment funds appear to have lost their taste for coffee after helping fuel a run-up to a 12-1/2-year peak in London earlier this year, and prices look unlikely to rally significantly from recent lows.
The prospect of bumper crops in top producers Brazil and Vietnam later this year has helped dampen enthusiasm among investors, while funds have also become more selective in their commodity investments after major reversals in several markets.
"I think they've lost their appetite a little bit. A lot of funds have been burnt in other commodities like CPO (crude palm oil) where you have really huge (price) swings, cotton as well," said Standard Chartered analyst Abah Ofon.
"I think funds are a bit more apprehensive now and so they have really cherry-picked commodities they would like to get into," he added.
Prices for London robusta coffee on the benchmark second month climbed to $2,815 a tonne in early March, buoyed by aggressive buying by investment funds, but then fell back sharply to $2,119 on Friday, a drop of 25 percent.
Arabica coffee in New York has followed a similar pattern with the second month rising to $1.7190 a lb in late February, the highest level in 10 years, before sliding around 25 percent with prices dipping below $1.30 last week.
"The feeling I have is that funds thought it was a one-way bet which obviously it wasn't," Ofon said.
EQUITIES RECOVER
A recovery in global equities during the last few weeks has also encouraged funds to return to those markets.
"I think a lot depends on how equity markets perform. There is a growing view we are getting to the end of the crisis. If that pans out then a lot of funds ... may decide to go for what they view as a safer bet in equities," Ofon said.
Ofon said, however, he did not believe coffee prices would plummet, expecting them to remain rangebound.
"The fact is there is still ample demand for coffee globally and that is going to provide a floor," he said.
CoffeeNetwork analyst Andrea Thompson said the setback in robusta coffee prices during the last few weeks partly reflected expectations of a record crop in 2008/09 in Vietnam, the key producer of robustas.
"For the last couple of months I've been told the crop (in Vietnam) is expected to be on a par if not bigger than the record crop," she said.
Vietnam produced a record crop of about 21 million 60-kg bags in 2006/07 and production fell back slightly in 2007/08 to around 19.5 million, Thompson said.
Output in top arabica producer Brazil is also seen rising this year with Thompson forecasting a crop of about 49 million bags. The prior year, the crop was about 39.1 million.
Thompson said it was unlikely that prices would return to levels reached in mid-March.
"I am not saying it is going to fall significantly below these levels but I think the upside is fairly limited when you consider the outlook for 2008/09," she said.
Nor did Barclays Capital analyst Sudakshina Unnikrishnan expect a significant rebound in prices.
"I think this looks like a pretty fair level for prices at the moment," she said, adding Barclays Capital was forecasting an average arabica price of $1.24 for the second quarter, $1.20 for the third and $1.23 for the fourth quarter.
"In general we don't see the same sort of compelling fundamentals on coffee and cocoa as we do for say the grains," Unnikrishnan said.