Commerzbank raised price estimates for New York-traded futures in raw sugar and arabica coffee, thanks to the drought in the major Brazilian producing states which has raised both contracts to multi-month highs.

However, even its upgraded estimates for arabica coffee futures came in well below the futures curve, seeing prices end the year at some 130 cents a pound, some 27% below the level which the December contract was suggesting on Wednesday.

For raw sugar, current market prices are not too far above the mark, on the bank's outlook.

Harvest losses

The bank acknowledged the hit to production in Brazil – both in 2014 and 2015 - from a January and February rated by Somar as the driest in 30 years.

"Optimistic forecasts of a Brazilian coffee harvest of partially more than 60m bags can no longer be maintained," Commerzbank said in a report, saying a harvest of 50m-55m bags was "more realistic".

And next year, "harvest losses of 10% are considered possible… if the coffee trees are unable to develop adequately", which has become more likely as the drought cuts the chances of replenishing water stores before the dry season, which typically begins in April.

"Bad news has also come in from Central America, as the expected 40% drop in the Mexican coffee harvest illustrates," with the region in the grip of an outbreak of coffee rust.

'No notable upside potential'

However, the extent of the rise in arabica futures, which have soared by more than 50% over the last month, is "exaggerated", Commerzbank said

"For the current price levels to be sustained, the coffee harvest in Brazil would have to fall to less than 50m bags this year and fail to recover noticeably next year. We forecast a more moderate scenario."

Moreover, higher prices will quell demand for arabica beans too, switching to demand to cheaper robusta beans, which the bank also saw retreating from current levels - ending the year at about $1,600 a tonne, some 18% below the futures curve - weighed by the boost to supplies from Vietnam's record harvest.

"We see no notable upside potential for the arabica price anymore and instead expect that after a stabilisation phase we will see falling quotations in the course of the year.

"Should our expectation of an imminent correction in arabica prices materialise, robusta prices too should find it difficult to escape from this pull."

'Further upside potential'

However, Commerzbank was more upbeat on sugar, saying that market estimates of a production surplus in 2014-15, which Kingsman and Dreyfus have pegged at 2m-5m tonnes, "are unlikely to sufficiently reflect the looming declines in the sugar cane harvest and sugar production in Brazil".

Parts of Sao Paulo, Brazil's top cane growing state, as well as Minas Gerais, the top coffee producing state, have been particularly affected by drought.

Furthermore, speculators remain net short on raw sugar futures and options, by 26,500 contracts as of last Tuesday, raising the prospect of price support from a rash of position covering.

"Combined with the perspective of a potential supply shortfall, this still argues for further upside potential in [sugar] prices, despite the increase seen so far."

'Serious situation'

The comments came as Job Economia, the Brazilian analysis group, lowered the bar further on expectations for the 2014-15 cane harvest in the Centre South region, responsible for some 90% of domestic output, and which includes Sao Paulo state.

After "almost perfect" weather up to November, and a water surplus, dryness has left crops with a water shortfall of 19%, a "serious" situation, Job Economia said.

"If rainfall returns to normal as from March the amount of cane crushed may be at the most 570m tonnes," the level pencilled in by co-operative giant Copersucar.

Rabobank has forecast a harvest of 595m tonnes, and Macquarie of 585m tonnes, compared with the 596m tonnes expected for this season.

Prices update

Arabica coffee for May stood 0.4% down at 175.50 cents a pound in late deals in New York, while robusta coffeefor May closed down 1.0% at $1,996 a tonne in London.

New York raw sugar for May was 0.1% lower at 17.66 cents a pound.