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

Coffee Market Report

10 Mar 2016
The well-respected commodity bankers Rabobank following an extensive field trip to inspect the maturing new coffee crops in Brazil have come forth with a new crop forecast that is well below most trade and industry forecasts, with their assessment of the new crop to be a relatively modest 51.8 million bags. This made up from a new drought affected conilon robusta crop that they perceive to be only 12.6 million bags and a new good rains benefited larger arabica coffee crop, which they have forecasted to be 39.2 million bags.

This forecast is somewhat supportive for market sentiment but one might suggest that it more implies that if this forecast is realistic, that it shall significantly reduce the export potential for conilon robusta coffees for the coming months and the forthcoming October 2016 to September 2017 coffee year, which would not really be much of a problem for the consumer markets. The surge in conilon robusta coffee exports over the past couple of years has been more price advantageous in nature than actual demand for this somewhat uniquely tasting robusta coffee and as a reaction to the internal price resistance slower sales out of Vietnam, than being related to demand for conilon robusta coffees. While the report does seemingly indicate that there shall be sufficient new crop arabica coffees, to fulfil consumer market demand for these coffees, which do have an irreplaceable quality demand within the consumer markets.

One might comment however that with Indonesia due for a significantly lower El Nino drought affected robusta coffee harvest this year and along with the tighter conilon robusta coffee supply out of Brazil, that the Vietnam farmers and internal traders with their significant stocks of robusta coffees in hand, can be expected to view the lack of competition as good reason to continue to show price resistance to the negative dictates of the soft prices of the London robusta coffee market. Thus one can foresee that robusta coffee exports out of Vietnam and therefore all other robusta coffee producers shall continue to come to the consumer markets at premium differentials to the price levels of the London market, for the longer term.

In the meantime with the El Nino while on the wane still having some influence upon weather conditions for the Pacific Rim countries there is much speculation within Vietnam that the country might be due for a late start for its April to September summer rain season. These reports likewise suggesting that the next Vietnam crop that shall be harvested over October to December this year, might be smaller than the last crop and is a factor that further inspires farmers and internal traders within Vietnam to continue with their price resistance towards the countries exporters who continue to battle to cover supply to fulfil their forward contract coffee commitments.

The May on May contracts arbitrage between the London and New York markets broadened yesterday, to register this at 58.25 usc/Lb., while this equates to a 47.61% 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 1,070 bags yesterday; to register these stocks at 1,517,709 bags. There was meanwhile a smaller in volume 570 bags increase to the number of bags pending grading for this exchange; to register these pending grading stocks at 10,120 bags.

There was little in the way of striking news coming to the fore to influence the commodity markets, but with the U.S. dollar losing a little weight through the day there was support within many markets and with the Oil markets once again taking the lead, the overall macro commodity index had a day of buoyancy. The Oil, Natural Gas, Cocoa, Coffee, Copper, Orange Juice and Wheat markets had a day of buoyancy and the Silver market was steady, while the Sugar, Cotton, Corn, Soybean and Gold markets tended softer for the day. The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 0.60% higher; to see this Index registered at 382.08. The day starts with the U.S. Dollar once again showing a degree of buoyancy and trading at 1.419 to Sterling and 1.098 to the Euro, while North Sea Oil is showing a degree of buoyancy in early trade and is selling at 40.30 per barrel.

The London market started the day yesterday on a relatively steady note, while the New York market started the day with modest buoyancy and with both markets maintaining this track into the afternoon trade. Both markets maintained this stance as the afternoon progressed and with the overall macro commodity index assisting to support sentiment for the New York market which finally seemed to encourage a degree of confidence within the London market which moved up to join the New York market in positive trade for late in the day trade. The London market ended the day on a positive note and with 85.7% of the earlier gains of the day intact, while the New York market ended the day on a less confident positive note and with only 54.2% of the earlier gains of the day intact. This close does however and with the charts tending to be technically positive for the present provide some degree of support for the markets and albeit that the renewed muscle of the U.S. dollar might be seen to be a negative factor, one might expect a follow through steady start for the markets for early trade today against the prices set yesterday, as follows:

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

MAR 1393 + 10                                       MAR 120.85 + 0.65
MAY 1420 + 12                                       MAY 122.35 + 0.65
JUL 1449 + 12                                            JUL 124.25 + 0.65
SEP 1474 + 10                                            SEP 126.05 + 0.70
NOV 1496 + 10                                         DEC 127.95 + 0.70
JAN 1515 + 10                                          MAR 129.85 + 0.65
MAR 1535 + 10                                        MAY 131.20 + 0.65
MAY 1557 + 10                                          JUL 132.25 + 0.65
JUL 1578 + 10                                            SEP 133.10 + 0.65
SEP 1601 + 10                                           DEC 134.40 + 0.60