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

Coffee Market Report

05 May 2016
The Brazilian government has announced yesterday that it shall increase its Credit facilities offered to the agricultural sector of the country by 8%, to 202 billion Reais or the equivalent of approximately 57 billion U.S. dollars. However these special and relatively low interest loans that had previously been available at relatively competitive interest rates during 2015 shall now only become available at higher interest rates for this year, but nevertheless still competitive with the cost of finance available from the banks.

In addition to these loans that are related to farm inputs, harvest costs and storage of crops etc., the Brazil government has reduced by 10% the funds available in special low interest loans for the finance of farm equipment that includes irrigation infrastructure, farm processing equipment and farm implements, with the finance now limited to 34 billion Reais or the equivalent of approximately 9.6 billion U.S. dollars. These loans shall also encounter increased interest rates relative to the rates applied last year, but shall nevertheless remain competitive to the cost of finance available from the banks.

Thus in terms of the Brazil coffee sector and with the new conilon robusta coffee crop already in full harvest and the new arabica coffee crop harvest soon to start picking up in volume, the costs for the finance of these crops are due to increase. While in the meantime with the reference prices of the international terminal markets remaining relatively soft and the Brazil Real having recovered in value from below 4 to the U.S. dollar to the present 3.54 Real to the dollar, the profit margins for the coffees farmers are presently narrowing is a factor that can be expected to inspire a degree of internal market price resistance for new crop coffee sales.

The physical coffee market is however within something of a doldrums for the present with most of main consumer market roasters adequately covered with forward contracts into the pending slow northern hemisphere summer roasting season and trade in physical coffees is for the present somewhat lacklustre in nature, which is contributing to something of a dull market for producers to chase. This week in terms of today’s Ascension Day public holiday that is celebrated by many European countries and including the important coffee trade countries Germany and Switzerland and to a lesser degree the holidays in the Netherlands and Belgium, is likely to become something of a long weekend holiday for many trade and industry executives, to further contribute to a particularly slow market for the end of this week.

The July on July contracts arbitrage between the London and New York markets broadened yesterday, to register this at 47.81 usc/Lb., while this equates to a 39.94% 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 were seen to decrease by 502 bags yesterday; to register these stocks at 1,378,313 bags. There was meanwhile a larger in volume 3,025 bags increase to the number of bags pending grading for this exchange; to register these pending grading stocks at 6,455 bags.

The Certified Robusta coffee stocks held against the London exchange were seen to decline by 26,000 bags or 0.94% in the week of trade leading up to Monday 2nd. May; to register these stocks at 2,750,500 bags on the day. These stocks that are dominated by a high percentage of Brazil conilon robusta coffees from last year’s good conilon crop and with premium export differentials now being experienced for all robusta coffee producers are the most affordable robusta coffees available to the market, but with the stocks being held in Europe and the conilon cup not favoured within the European industry, the drawdown of these stocks remains slow.

One might expect however that with the significantly smaller new Brazil conilon robusta crop that is now in harvest and with the domestic Brazilian market due to take delivery of the majority of this crop and likewise inflating export differentials for the remaining coffees, that there shall be growing interest in these certified robusta coffees from the North American roasters. The conilon robusta cup quality is a familiar and popular cup within this market and for the present, the certified conilon robusta coffee stocks are becoming something of an attractive option for the North American roasting industry.

The commodity markets had a mixed day yesterday and with the overall macro commodity index taking something of a sideways track for the day, while the U.S. dollar had a likewise flat day. The Natural Gas, Sugar, Coffee, Wheat and Soybean markets had a day of buoyancy, while the Oil, Cocoa, Cotton, Copper, Orange Juice, Corn, 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 0.01% lower; to see this Index registered at 404.96. The day starts with a steady U.S. Dollar which is trading at 1.452 to Sterling and 1.148 to the Euro, while North Sea Oil is showing some degree of buoyancy in early trade and is selling at 43.55 per barrel.

The London market started the day yesterday posting some modest losses, while the New York market started the day with a degree of buoyancy which was continued into the early afternoon trade and accompanied by a return to par on the part of the London market. It was however a day of little excitement and with both markets trading within a particularly narrow price range and either side of par, albeit that by the close the markets managed to remain within positive territory. The London market continued to end the day with some degree of buoyancy and with 60% of the earlier gains of the day intact, while the New York market likewise ended the day with some degree of buoyancy, but with only 39.1% of the earlier gains of the day intact. This close does little to inspire but with many of the consumer market trade players side lined by the Ascension Day holiday today and little in the way of striking fundamental market news available to the funds and the speculative sectors of the market, one might expect to see only something in the way of a steady start for early trade today against the prices set yesterday, as follows:

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

MAY 1552 – 2                                       MAY 119.10 + 0.50
JUL 1585 + 6                                            JUL 119.70 + 0.45
SEP 1603 + 4                                            SEP 121.55 + 0.40
NOV 1620 + 3                                         DEC 124.15 + 0.40
JAN 1636 + 1                                         MAR 126.75 + 0.45
MAR 1648 unch                                     MAY 128.30 + 0.50
MAY 1663 unch                                        JUL 129.65 + 0.55
JUL 1676 unch                                          SEP 130.80 + 0.55
SEP 1692 unch                                         DEC 132.75 + 0.65
DEC 1711 unch                                       MAR 134.55 + 0.70