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I. & M. Smith (Pty) Ltd.

Coffee Market Report

09 Mar 2016
The 4th. International Coffee Conference organised by the International Coffee Organisation and hosted by the Ethiopian government came to close yesterday post three days of presentations, but with little in the way of striking new news coming to the fore. There are however and with many international traders and consumer industry executives attending follow on meetings due to take place for the rest of the week, but these shall be mostly commercial in nature.

During the conference the International Coffee Organisation did however indicate that they assess global coffee production for the October 2015 to September 2016 coffee year to be a modest 143.4 million bags, as against coffee global coffee consumption of 152.1 million bags for last year and presumably due to rise during this year. This assessment thus indicating that the coffee supply deficit for this present coffee year would be something in the region of 9 million bags, which the International Coffee Organisation has assessed shall nevertheless be covered by producer stocks and would not result in severe shortages of coffee supply.

The International Coffee Organisation is by nature of its official industry appointment obliged to include within its combined figures the official production figures that are forwarded by its producer members and with many producers forwarding what is seen to be conservative numbers, there is a general view that the production figures reported are 4 million to 5 million light of reality. Thus while most within trade and industry would agree that global coffee consumption might be close to the official International Coffee Organisation figure of approximately 152 million bags per annum, the more realistic trade and industry view would be that the global coffee supply deficit for the present coffee year would be closer to 4 million to 5 million bags.

This deficit with trade and industry forecasts for the Brazil new crop and despite a dip in conilon robusta production looking to be approximately 8 million bags larger than last year, would initially indicate a modest surplus global coffee supply for the coming October 2016 to September 2017 coffee year. There is however already evidence that the new robusta coffee crop from Indonesia shall dip by approximately 2 million to perhaps even as much as 3 million bags this year, due to the dry weather conditions that came with the El Nino, as there is the probability that the El Nino might lower the new Colombian Mitaca crop by in excess of 1 million bags. Thus if one is to presume business as usual for the rest of the main producer blocs, it would still indicate that there is due to be only a very modest surplus coffee supply for the coming coffee year.

This said one would take the view that with producer stocks and in this respect mostly Brazil and Vietnam stocks declining while they fulfil the present coffee year deficit coffee supply, that by the time of the next October 2016 to September 2017 coffee year that global coffee supply might start to tighten up. This being a factor that with the somewhat unpredictable funds aside, which should start to buoy prices within the somewhat undervalued coffee terminal markets later in the year. This is a view that is seemingly being taken by many producers, with internal market price resistance prevailing within many producer markets and with farmers continuing to resist what they perceive to be the negative price dictates of the relatively soft terminal markets.

The May on May contracts arbitrage between the London and New York markets broadened yesterday, to register this at 57.83 usc/Lb., while this equates to a 47.52% 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 2,324 bags yesterday; to register these stocks at 1,518,779 bags. There was meanwhile no change to the number of bags pending grading for this exchange; to register these pending grading stocks at 9,550 bags.

The commodity markets were in receipt of improved industrial production figures from Germany yesterday, to indicate that alike the U.S.A. there are prospects for growth, but with little in the way of positive news out of Asia and the Oil markets coming of their highs, the overall macro commodity index took a bit of a negative track for the day. The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 0.32% lower; to see this Index registered at 379.79. The day starts with the U.S. Dollar showing a degree of buoyancy and trading at 1.418 to Sterling and 1.097 to the Euro, while North Sea Oil is showing a degree of buoyancy in early trade and is selling at 38.90 per barrel.

The London and New York markets started the day on a modestly softer note yesterday and maintained this negative stance into the afternoon trade, but with the New York market starting to recover and move back above par and with the London market following suit to join the New York market in positive territory as the afternoon progressed. This recovery set a positive base and saw both markets maintain a positive stance for the rest of the day’s trade, with the London market ending the day with 77.8% of the earlier gains of the day intact, while the New York market ended the day on a likewise positive note and with 76.2% of the earlier gains of the day intact. This overall positive close albeit modest in nature might be seen to be constructive, but with the U.S. dollar showing a little more muscle one might expect little better than a steady start for early trade today against the prices set yesterday, as follows:

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

MAR 1383 + 19                                       MAR 120.20 + 1.55
MAY 1408 + 14                                       MAY 121.70 + 0.80
JUL 1437 + 12                                            JUL 123.60 + 0.90
SEP 1464 + 12                                            SEP 125.35 + 0.95
NOV 1486 + 12                                         DEC 127.25 + 0.95
JAN 1505 + 12                                         MAR 129.20 + 1.05
MAR 1525 + 12                                       MAY 130.55 + 1.10
MAY 1547 + 12                                         JUL 131.60 + 1.10
JUL 1568 + 12                                            SEP 132.45 + 1.05
SEP 1591 + 12                                           DEC 133.80 + 1.00