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I. & M. Smith (Pty) Ltd.

Coffee Market Report

27 Oct 2020

The weather conditions within the two largest coffee producer countries are in focus at this time of year, as the onset of rains have assisted to set the flowering for the next 2021 Brazil crop to come. The weather forecasters are presenting models for sporadic rainfall across the vast Brazil coffee belt over next week towards the end of October, with many reports indicating that more than half of all the flowering has already occurred, which would be considered relatively normal for this time of year. In Vietnam meanwhile, the cessation of the rains will soon be required to assist this largest Robusta producer to begin their October 2020 to September 2021 coffee year and for the coming harvest to take place, which reports suggest is delayed this year due to slower than usual maturation and the continued wet season rainfall, however forecasters predict that new crop coffees will begin to flow to internal markets around December.

Meanwhile soon to be hanging over the New York market in the coming months and aside from Brazil, shall be relatively large volumes of new main crop Colombian coffees and along with the new Mexican and Central American coffee crops. These coffees unless the speculative funds find reason not to continue decreasing their net long position within this market, most likely to increase the volumes of price fixation hedge selling and to create something of a price ceiling for the market.

Many independent forecasters predict that production volumes from Mexico, Colombia and Central America meanwhile, the largest washed arabica producer bloc are cumulatively countries that in combination, will report slightly below average production volumes this October 2020 to September 2021 coffee year. Weather has been generally conducive overall, though the concern remains the relatively low income to producers that is linked to the sustained low values presented in the New York arabica futures market and for many of these washed arabica producer countries, this will be the fourth coffee year of continued low coffee prices. There has been a resultant lack of resources ahead of the crop harvest for adequate inputs, as well as a lack of affordability on the part of producers to pay for labour that comes with washed arabica process of selective ripe coffee cherry picking during harvest time. There have also been some concerns raised around the additional challenge that Covid-19 movement restrictions present, and whether this might be a contributory factor in the months to come. The general industry forecasts are therefore across the Central American washed arabica producer bloc that this coming October 2020 to September 2021 crop year, is set for a prospectively lower overall production to come, in the coming coffee year.

Coffee production for the October 2020 to September 2021 Coffee year in Colombia is forecasted to be 0.7% lower than the previous coffee year at a total of 14.2 million bags. In Mexico coffee production for the October 2020 to September 2021 Coffee year is forecasted to be 5.26% lower than the previous coffee year at a total of 3.6 million bags. Guatemala meanwhile is expected to produce 6.06% less than the previous year at a total of 3.1 million bags. Honduras is forecasted to produce 5.26% more than the previous year at a total of 6 million bags, while production for the October 2020 to September 2021 coffee year in El Salvador is expected to be 14.3% lower than the previous year at a total of 600,000 bags. Nicaragua coffee production is seen to be 14.81% lower than the previous year at a total of 2.3 million bags for this October 2020 to September 2021 coffee year.

The latest Commitment of Traders report from the New York arabica coffee market has seen the shorter term in nature Managed Money fund sector of this market decrease their net long position by 26.80% within this market over the week of trade leading up to Tuesday 20th. October; to register a new net long position of 19,738 lots. Meanwhile the longer term in nature Index Fund sector of this market decreased their net long position within the market by 4.14%, to register a net long position of 53,741 Lots on the day.

Over the same week, the Non-Commercial Speculative sector of this market cut their net long position within the market by 23.72% to register a new net long position of 15,488 Lots which is the equivalent of 4,390,779 bags. This net long position has most likely been further decreased, following the period of mixed but overall softer trade that has since followed. 

The December 2020 to January 2021 contract arbitrage between the New York and London markets widened yesterday: to register this at 47.09 usc/Lb. This equates to 44.15% price discount for the London Robusta coffee market.

The Certified washed Arabica coffee stocks held against the New York exchange was seen to decrease by 470 bags yesterday, to register these stocks at 1,128,560 bags, with 93.90% of these certified stocks being held in Europe at a total of 1,059,800 bags and the remaining 6.10% being held in the USA at a total 68,760 bags. There was meanwhile a larger in number 10,600 bags increase to the number of bags pending grading for this exchange; to register these pending grading stocks at 66,773 bags.

It was a modest softer day overall on the commodity markets yesterday, to see the overall macro commodity index taking something of a sideways track for the day. The Sugar, Cocoa and Coffee markets ended the day on a positive note. The Reuters Equal Weight Continuous Commodity Index that is related to 17 markets is 0.4200% lower; to see this index registered 418.8893.   The day starts with the U.S. Dollar steady, trading at 1.304 Sterling, at 1.183 the Euro and with the US Dollar buying 5.624 Brazilian Real. 

The New York and London markets started the day yesterday trading on a modest positive note, both markets continued on this positive track for much of the early morning trade. As the afternoon progressed the New York and London markets came under a slight degree of selling pressure however this was short lived and the markets soon recovered to trend positive towards the close. The markets were seen to hit a ceiling and drop back off the highs of the day to settle on a positive note for the day.

The London market ended the day with on a positive note with 61.53% of the earlier gains of the day intact, while the New York market ended the day on a positive note with 67.74% of the earlier gains of the day intact. This firmer close might inspire some degree of confidence to possibly set the markets for a hesitant steady start to early trade today, against the prices set yesterday, as follows:

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

NOV   1276 + 5                                                              DEC   106.65 + 1.05
JAN    1313 + 8                                                               MAR   109.35 + 0.95
MAR   1321 + 8                                                              MAY  111.05 + 1.00
MAY   1335 + 8                                                               JUL    112.60 + 1.05 
JUL     1353 + 9                                                                SEP    113.85 + 1.00
SEP    1370 + 9                                                               DEC   115.50 + 1.00
NOV   1387 + 9                                                              MAR   117.05 + 1.00
JAN    1403 + 9                                                                MAY   118.10 + 0.95