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

Coffee Market Report

04 Dec 2015
The main arabica coffee districts in South East Brazil continue to be in receipt of good rains and supported by the prevailing El Nino phenomenon within the Pacific Ocean, which traditionally brings increased rains for southern Brazil. Thus with the El Nino forecasted to carry on through the first quarter of the coming year, one might feel secure for the present, with the forecasts for a significantly larger new arabica coffee crop for the coming year, which some are indicating might be as much as 40 million bags.

There does however continue to be problems for the conilon robusta coffee districts further to the north of the main arabica coffee districts and over the state of Espirito Santo, where rains have remained dismal in volume for the past three months. This situation and with water support for the many irrigated farms becoming threatened, is underpinning the forecasts for a significantly lower conilon robusta coffee crop for the coming year, which might prove to be less than 15 million bags.

If one is to take this situation for the potential dip in the conilon robusta crop for the coming year, it would make one question the earlier forecasts for a new 2016 Brazil crop of close to 60 million bags. These ambitious forecasts might of course be realistic but one might be safer in terms of planning, to be looking towards a new Brazil crop that is closer to 55 million bags. Thus while it would be a crop sufficient to cover domestic and export market demand, it would be a crop that would contribute only modest volumes towards the rebuilding of what shall be by then, the much depleted Brazil carry over coffee stocks.

Added to the mixed weather issues in Brazil that have come with the El Nino phenomenon and one that has worldwide impact, is the potential for this phenomenon and the dry weather it is bringing to Indonesia, to perhaps result in a dip in Indonesian coffee production in the coming year. Some are suggesting that this decline in Indonesian coffee production which has recorded good production levels this year, might even see the crop next year dip in excess of 2.5 million bags.

Such a dip with the Indonesian coffee production dominated by the robusta coffees that this year accounted for approximately 86% of total production shall be easily countered through the coming year by the approximate 2 million to 3 million bags of increased production from the new Vietnam crop depending upon which forecast one is to believe, but such a problem in Indonesia shall most probably tighten up global robusta coffee supply by the second half of next year.

All this said and with the influences of the El Nino which also is going to have some impact upon coffee production within other leading coffee producer blocs and including Colombia, Peru, Central America, East Africa and India, one might think that by the second quarter of next year there might be fundamental reasons for tightening coffee supply to be hitting the coffee press. Thus making one think that the coffee markets that are presently under pressure from the short sold managed money funds and speculative sectors of the market, might have limited downside potential, but have rather a more significant longer term upside potential. However with still the prospects for sufficient global coffee supply, to provide for a producer selling ceiling to the markets and to limit the probability of surging market prices for the coming year.

The March on March contracts arbitrage between the markets broadened yesterday, to register this at 53.95 usc/Lb., while this equates to a 43.21% price discount for the London robusta coffee market. This arbitrage remaining relatively attractive to roasters in comparison to arabica coffee prices, but is perhaps due to widen further in time and when Vietnam stocks start to impact in more volume upon the fortunes of the London market.

The Certified washed Arabica coffee stocks held against the New York exchange were seen to decrease by 6,220 bags yesterday; to register these stocks at 1,820,338 bags. There was meanwhile a smaller in volume 2,815 bags increase to the number of bags pending grading for this exchange; to register these pending grading stocks at 6,220 bags.

The Certified Robusta coffee stocks held against the London exchange were seen to decrease by 3,333 bags on Wednesday 2nd. December; to see these stocks registered at 3,334,667 bags on the day.

The commodity markets were lacklustre in nature early in the day yesterday but with the European Central Bank dropping interest rates and the dollar losing some muscle, the markets took a positive turn as the day progressed. This saw the overall macro commodity index taking a relatively sharp positive correction, as the day progressed. The Oil, Natural Gas, Sugar, Cocoa, Coffee, Cotton, Copper, Wheat, Corn, Soybean, Gold, Silver and Platinum markets had a day of buoyancy, while the Orange Juice market had a softer day’s trade. The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 1.19% higher to see this Index registered at 384.10. The day starts with the U.S. Dollar near to steady in early trade and trading at 1.512 to Sterling and 1.094 to the Euro, while North Sea Oil is steady in early trade and is selling at 42.80 per barrel.

The London and New York markets started the day on a hesitantly softer note, but with the London market recovering and heading back above par in early afternoon trade. However with the news from Europe coming to the fore and the dollar losing some weight the New York market moved back into positive territory and soon started to trigger buy stops to accelerate the gains, which was followed by further gains for the London market and both markets taking heart from the positive nature of the macro commodity index. The London market continued to end the day on a positive note and with 71.2% of the earlier gains of the day intact, while the New York market ended the day on a very positive note and with 88.9% of the earlier gains of the day intact. This unforeseen sharp positive correction albeit mostly influenced by outside from coffee forces does improve the look of the charts and one might think shall along with the softer U.S. dollar that is in play, provide sufficient inspiration for a follow through steady start for early trade today against the prices set yesterday, as follows:

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

JAN 1537 + 38                                              DEC    122.05 + 4.25
MAR 1563 + 37                                           MAR    124.85 + 4.40
MAY 1591 + 40                                           MAY    127.05 + 4.40
JUL 1613 + 40                                               JUL    129.10 + 4.35
SEP 1633 + 40                                               SEP    130.95 + 4.30
NOV 1653 + 41                                            DEC    133.70 + 4.25
JAN 1669 + 41                                            MAR    136.35 + 4.15
MAR 1687 + 41                                          MAY    138.20 + 4.10
MAY 1709 + 41                                            JUL    139.85 + 4.10
JUL 1745 + 41                                              SEP    141.30 + 4.10