I. & M. Smith (Pty) Ltd. since 1915
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I. & M. Smith (Pty) Ltd.

Coffee Market Report

08 Sep 2016

Dry weather over the conilon robusta areas in Brazil and following on from a dry weather damaged new conilon robusta coffee crop this year, weighed upon sentiment within the coffee markets yesterday, to assist to continue to buoy the markets. This news underpinned by the somewhat questionable assessment by the Brazil National Statistics Institute, who had the previous day reported that the new conilon crop was only 8 million bags and a number that falls short of even domestic market demand.

The big question is now with the funds no doubt holding extensive long positions within the volatile New York market, when shall a degree of exhaustion start to set in and perhaps even inspire some volumes of profit taking selling. This however might not happen until the new spring and summer rain season that often starts in the second half of September, but often does not kick in until early October. Thus one can perhaps foresee a continued support coming to the fore for the present higher trading range and with the markets yesterday setting new eighteen month highs, the markets are very much in the hands of the bulls for the present.

Indications are for flat consumption figures for the traditional coffee markets in Western Europe, while there are signs of only modest coffee consumption growth within the leading North American market and one might comment that aside from market saturation and limited population growth, that there is also a negative influence from the growing market share that is being taken by the efficient and low volume per cup coffee capsule industry. This sector of the industry and despite some negative comments over the pollution aspect of the empty capsules, becoming ever more popular within the higher income main stream consumer markets.

There is however continued consumption growth within the new markets in the Middle East, Asia and Eastern Europe and it is interesting to see that the Russian green coffee imports for the first seven months of this year from January to July 2016 were 11.23% higher than the same period last year, at a total of 1,535,000 bags. These imports were however while significantly larger in volume, 8.86% lower in customs declared value at 263.4 million U.S. dollars.

It is an impressive growth in green coffee imports but one might comment that it might not directly reflect upon actual consumption as there is a steady development in the local Russian roasting capacity and for both the roast and ground and soluble products and at the expense of imported roasted and soluble coffees, which would reflect in terms of higher volumes of green coffee imports. While with the corresponding dip in unit value of these seven months of imports, it might suggest that there has been some opportunist forward cover in terms of stocks and that this might be seen in the form of declining import volumes in the follow on months. But it is nevertheless a healthy sign that despite the economic problems in Russia, that there are positive coffee import figures coming to the fore.

While there is no doubt that there is steady growth in coffee consumption within both the new consumer markets and many of the producer markets, the numbers are very difficult to accurately assess and particularly so within the producer markets where there has often been informal and unquantifiable consumption. But with a wide range of global consumption numbers being voiced the indication is something in excess of 153 million bags per annum, which with the latest reports on the Brazil crop and the global new crop forecasts, would indicate the possibility of an approximate 2 million bags deficit supply for the coming October 2016 to September 2017 coffee year.

However, with still reasonable consumer market stock levels in hand, this potentially small deficit supply is so far not a matter of major concern but would become so, if there were any unforeseen crop damaging climatic issues developing for any of the major producer blocs. Thus one can expect that there shall be a keen eye kept upon the development of the spring and summer Brazil rain season, which is likely to become a pivotal factor for longer term market direction.

The November to December contracts arbitrage between the London and New York markets broadened yesterday, to register this at 68.37 usc/Lb., while this equates to a 44.08% price discount for the London robusta coffee market. This arbitrage remaining relatively attractive to roasters in comparison to arabica coffee prices, continues to inspire support for the robusta coffee sector of the industry.

The Certified washed Arabica coffee stocks held against the New York exchange with the exchange were seen to decrease by 1,931 bags yesterday; to register these stocks at 1,272,008 bags. There was meanwhile, a larger in volume 3,665 bags decrease to the number of bags pending grading for this exchange; to register these pending grading stocks at 8,031 bags.

The commodity markets were mixed in trade but with some degree of stability for the U.S. dollar tending to dampen spirts within many markets, albeit that the overall macro commodity index did manage to take a positive track for the day. The Oil, Sugar, Coffee, Copper, Wheat, Corn and Soybean markets had a day of buoyancy, while the Natural Gas, Cocoa, Cotton, Orange Juice and Gold markets had a softer day’s trade. The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 0.53% higher; to see this Index registered at 420.29. The day starts with the U.S. dollar near to steady in early trade and trading at 1.334 to Sterling and 1.125 to the Euro, while North Sea Oil is showing a degree of buoyancy in early trade and trading at 48.25 per barrel.

The London and New York markets opened the day yesterday on a modestly positive note, but with the New York market soon attracting some selling pressure and dipping back to below par, while the London market maintained its buoyancy and with both markets taking this mixed track into the early afternoon trade. As the afternoon progressed and with trading volumes picking up the New York market recovered into positive territory and with both markets adding value, prior to taking something of a sideways positive track through to the close of the day. The London market ended the day on a very positive note and with 95.8% of the earlier gains of the day intact, while the New York market ended the day on a positive note and with 71.1% of the earlier gains of the day intact. This close assists to paint a positive technical picture and one would think, should be able to inspire a steady start for early trade today against the prices set yesterday, as follows:

LONDON ROBUSTA US$/MT     NEW YORK ARABICA USc/Lb.

SEP 1902 + 35                                SEP 153.85 + 1.40
NOV 1912 + 23                             DEC 155.10 + 1.35
JAN 1934 + 23                             MAR 158.30 + 1.45
MAR 1947 + 22                            MAY 160.10 + 1.50
MAY 1956 + 20                              JUL 161.75 + 1.60
JUL 1962 + 16                                SEP 163.10 + 1.60
SEP 1971 + 16                               DEC 164.90 + 1.60
NOV 1983 + 16                            MAR 166.55 + 1.50
JAN 1992 + 16                              MAY 167.60 + 1.45
MAR 1999 + 16                              JUL 168.60 + 1.45