World coffee markets are expected to post a surplus of 4.76 million 60 kilogram bags in the 2011-12 season, less than half of this year's forecast of 10.53 million bags, ABN Amro said Friday.
Arabica production is expected to fall 5% to 80.97 million bags as the world's largest producer, Brazil, enters its low harvest cycle. That leaves markets with a surplus of just 690,000 bags as demand rises to 80.28 million bags, up from 79.50 million bags in 2010-11.
Robusta markets are expected to be less tight as supply exceeds demand by 4.07 million bags, the bank said. But it warned that lower supplies of arabica could boost robusta demand next year, currently pegged at 51.32 million bags.
"The robusta surplus could be significantly eroded, as roasters who have traditionally preferred arabica may have little choice other [to]...switch some production to using robusta," it said.
Brazil is expected to produce a record-off year crop of 43.5 million bags, up 10% compared with the previous low cycle in 2009-10. Multi-decade high prices for coffee and other agricultural commodities are expected to boost investments in the sector to an unprecedented $122 billion this year, although rising land prices--up 50% in the past 5 years--are likely to limit acreage growth.
But in Colombia, a key producer of mild washed arabicas, ongoing problems with rainfall in the south means hopes that the country will harvest 9-9.5 million bags "might be over-optimistic," said ABN Amro.
Meanwhile, output from Vietnam, the world's largest grower of robusta beans, is expected to rise to rise by 1.5 million bags to 21.5 million bags as high prices this year help farmers improve husbandry techniques.
In Indonesia, however, the excessive rainfall which inhibited harvesting in 2010-11 are expected to affect crop development in 2011-12, cutting robusta production 18% on year to 6.75 million bags and arabica to 1 million bags.
"Yields are down as farmers have been picking cherries since January after persistent rains caused the flowering season to begin earlier in some districts," said the bank.
With supplies expected to tighten next year against a backdrop of rising consumption, prices are expected to rebound after a recent pullback from their 32-year highs in April, said ABN Amro. It pegged the next target price for arabica at $3.18/pound, the spot price touched in May 1997.
It also reduced its estimate for the current 2010-11 surplus by 900,000 bags of arabica to 5.64 million bags and 290,000 bags of robusta to 4.89 million bags.
"The bullish outlook remains not only intact but, if we are correct in our estimates for the 2011-2012 season, reinforced," said the report.
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