Coffee prices are vulnerable to a recovery on any weather setback in Brazil, Rabobank said, as it raised by 1.0m bags its forecast for the world production deficit next season, thanks to increased consumption hopes.
The bank acknowledged that coffee futures - which in the last session tumbled nearly to 11 month lows in New York, as the Brazilian real tumbled on allegations that President Michel Temer had bribed a witness – could yet see further declines for now.
"In the short term, we can see some further downside [to prices]," said Rabobank analyst Carlos Mera.
"Funds have been keen sellers," against a backdrop of a rise in visible inventories, while the real "remains a potential dominant bearish factor".
Weakness in the currency undermines the value, in dollar terms, of assets such as coffee and sugar in which Brazil is a major player.
'Very strong demand'
However, "demand has been very strong", the bank said, raising its forecast for global consumption this season by 700,000 bags to 156.2m bags, and in 2017-18 by 1.4m bags to 159.8m bags.
The upgrade reflected "surprisingly strong" disappearance of beans, apparent when comparing import and inventory data in major consuming countries.
With the strong consumption undermining supplies - in a year when Brazil will its coffee production sag thanks to it being an "off" year in the country's biennial cycle – "we believe chances are for an exacerbated weather market during the Brazilian winter", Mr Mera said.
The comments come as Brazil is heading into its annual period of frost risk for southern areas, with freezes in having a history of provoking spikes in prices, and indeed spurring a significant shift north in production from Parana to Minas Gerais.
However, Mr Mera flagged the flowering period, typically around September-October, as an especially likely source of weather-related price gains.
Global production deficit
The upgrade to the consumption figures fed through into an estimate that world coffee production in 2017-18 will fall 6.8m bags short of demand.
That is 1.5m bags higher than Rabobank's previous forecast, last month.
The bank kept its forecast for world production next season at 153.0m bags, including an estimate of 49.2m bags in Brazilian output.
While down 4.8m bags year on year, a Brazilian crop at that level would be comfortably above a 45.6m-bag forecast earlier this week from Conab, the country's official ag bureau.