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

Coffee Market Report

21 Mar 2016
The latest Commitment of Traders report from the New York arabica coffee market has seen the Non Commercial Speculative sector of this market decrease their net short sold position within the market by 141.5% during the week of trade leading up to Tuesday 15th. March; to register a net long position of 5,690 Lots. This net long position which is the equivalent of 1,613,090 bags has most likely been further increased, following the period of overall positive trade, which has since followed.

The largest coffee cooperative in Brazil Cooxupe have reported on Friday that they estimate that with the larger new arabica coffee crop due to start coming into play for the third quarter of this year, that farmers have so far sold forward the equivalent of 28% of this new crop, as opposed to a 30% factor at the same time last year. This has to be seen however in terms of the fact that this is a 28% factor of what is largely seen to be in excess of a 20% increase in the arabica coffee production this year as against a dip in conilon robusta coffee production to contribute to an overall 7% increase in overall coffee production for the year.

Therefore the report indicates that new crop arabica coffee forward sales have in reality been significantly higher than the at the same time last year and ahead for the previous year’s partial drought affected smaller crop, which would further indicate that farmers have perhaps already forward sold close to sufficient volumes of their new crop to support raising finance towards costs of the harvest of their new crop. Thus with the Brazil Real having recovered from trading at over 4 to the U.S. dollar and now trading at 3.62 to the dollar, that there is a potential for forward selling of Brazil arabica coffees and the related price fixation selling volumes against the New York arabica coffee market has good reason to slow and by nature, be somewhat supportive for this market. This is of course, so long as the often unpredictable funds do not see reason to become bearish towards the market.

There are also reports that with the ongoing political chaos within Brazil which is threatening medium term stability for the Brazil economy, that many farmers are starting to see their new crop coffee stocks as a security factor against the possibility of renewed pressure upon the medium term fortunes of the Brazil Real. Which is likely to further slow forward selling volumes of their new crop coffees and so long as the funds do not see reason to once again sell the coffee markets short, that it shall further assist the New York arabica coffee market to maintain its new found buoyancy. But for the present the political issues in Brazil and the related threat to the present administration have proved to be more supportive for the muscle of the Brazil real than negative and unless this changes and the international coffee market does not continue to rally, it might not after influence the holding back of new crop sales.

In terms of physical coffee supply the stevedores in the leading Brazil coffee port of Santos have scheduled a one day strike for today, but with the threat that if their demands for wage increases to counter the negative effects of the prevailing inflation rate that now exceeds 10% per annum, that they might extend the strike. It is early days though, but if this strike were to continue for an extended period and with Brazil arabica coffees holding an important share within the mainstream consumer market blends, it does threaten balanced coffee market supply to the consumer markets and is a factor to be watched.

The May on May contracts arbitrage between the London and New York markets broadened on Friday, to register this at 67.08 usc/Lb., while this equates to a 49.95% price discount for the London robusta coffee market. This arbitrage remaining relatively attractive to roasters in comparison to arabica coffee prices, with the good discount most likely due to remain in place for the foreseeable future, in line with steady robusta shipments out of Vietnam.

The Certified washed Arabica coffee stocks held against the New York exchange were seen to decrease by 5,817 bags on Friday; to register these stocks at 1,440,001 bags. There was meanwhile a smaller in volume 2,069 bags increase to the number of bags pending grading for this exchange; to register these pending grading stocks at 41,244 bags.

The commodity markets tended to falter following a week of buoyancy on Friday and were mixed for the day and with the overall macro commodity index tending softer for the day. The Cocoa, Coffee, Orange Juice and Wheat markets nevertheless had a day of buoyancy, while the Oil, Natural Gas, Sugar, Cotton, Copper, Corn, Soybean, Gold and Silver markets had a softer day’s trade. The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 0.56% lower; to see this Index registered at 391.97. The day starts with the softer U.S. Dollar showing modest buoyancy and trading at 1.441 to Sterling and 1.126 to the Euro, while North Sea Oil is near to steady in early trade and is selling at 38.55 per barrel.

The London market started the day on Friday with a degree of opportunist price fixation selling pressure coming into play, while the New York market continued to show it muscle with follow through buoyancy and with the markets taking this mixed stance into the afternoon trade. However as the afternoon progressed and with the New York market holding its value the London market started be inspired and with selling pressure slowing, moved back up through par and to join the New York market in positive territory. The markets held on to their gains and bucking the negative influences of the softer macro commodity index continued to progress to end the day, on a positive track. The London market ended the day on a positive note and with 63.9% of the earlier gains of the day intact, while the New York market ended the day on a likewise positive note and with 71.4% of the earlier gains of the day intact. This close and with the charts supportive for the markets is constructive, but with the evidence of the new found long positions within the New York market that are likely to have been further extended, there might be some opportunist selling pressure due for the New York market due for early trade today and only a near to steady start due for the markets for early trade today against the prices set on Friday, as follows:

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

MAR 1447 + 19                                          MAR 133.85 + 1.85
MAY 1482 + 23                                          MAY 134.30 + 1.75
JUL 1511 + 24                                               JUL 136.15 + 1.90
SEP 1536 + 24                                               SEP 137.65 + 2.00
NOV 1556 + 23                                            DEC 138.95 + 1.90
JAN 1574 + 22                                            MAR 140.15 + 1.80
MAR 1595 + 20                                          MAY 141.25 + 1.75
MAY 1617 + 20                                            JUL 142.00 + 1.70
JUL 1641 + 20                                               SEP 142.55 + 1.75
SEP 1664 + 20                                              DEC 143.95 + 1.65