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

Coffee Market Report

11 Mar 2016
The Coffee Exporters Association of Brazil has reported that the countries green coffee exports for the month of February were 14,793 bags or 0.6% higher than the same month last year, at a total of 2,497,592 bags. While added to this the countries value added soluble coffees for the month and calculated in terms of their green coffee equivalent were 20,442 bags or 7.84% higher than the same month last year, at a total of 281,205 bags. This resulted in the combined coffee exports for the month of February to being 35,235 bags or 1.28% higher than the same month last year, at a total of 2,778,797 bags.

However in terms of volume and despite the modest rise in volume, the value of Brazil’s coffee exports for the month of February were 123.8 million U.S. dollars or 23.13% lower than the same month last year, at a total of 411.4 million U.S. dollars. However with the Brazil Real trading in February 2015 at around 2.83 Reais to the U.S. dollar as against an exchange rate of around 3.97 Reais to the U.S. dollar in February 2016 and in terms of local currency the value of the Brazil coffee exports in February in domestic currency terms was still 7.83% higher than the same month last year.

One might suggest however that with Brazil inflation that is now above 10% per annum that the advantage of the weaker Brazil Real to the U.S. dollar in terms of countering the prevailing soft coffee prices has been mostly eroded, which must be a matter of concern for the Brazil coffee farmers. Thus one might expect that with carry over Brazil coffee stocks significantly reduced and with the probability of the better but only modestly surplus new crop on the horizon, that the relatively soft value of the international coffee terminal markets shall encourage increasing internal market price resistance within Brazil for the coming months.

The traditionally conservative official Government Statistics Institute in Brazil IBGE have forecasted that the new Brazil crop shall be 13% higher than last year’s crop at a still modest 49.7 million bags, which shall be made up from 10.8 million bags of conilon robusta coffees and 38.9 million bags of arabica coffees. One has to however in terms of the numbers take into account that the IBGE have the last Brazil crop on paper at approximately 44 million bags, whereas this crop has largely been seen to have been approximately 11% higher than this number and thus if one is to adjust their forecast by a similar percentage, it would indicate a new crop factor of in excess of 55 million bags and more in line with the lower side of many other private trade and industry forecasts and one would not expect that this IBGE forecast shall have much influence upon market sentiment.

Ahead of the new robusta crop in Indonesia and following many forecasts that due to El Nino dry weather this crop shall be approximately 20% lower this year, an official of the Speciality Coffee sector of the Association of Indonesian Coffee Exporters and Industries has forecasted increased coffee supply from Indonesia this year and 2016 production of approximately 11.67 million bags. But one would think that the market shall take a somewhat sceptical view towards this relatively ambitious forecast, while the internal market price resistance for the modest stocks within the country might well be a sign that the farmers do not foresee anything other than modest production for this year.

The U.S. Governments National Weather Service’s Climate Prediction Centre has forecasted that with the prevailing El Nino phenomenon within the Pacific Ocean now very much on the wane, that there is a 50% chance for a follow on La Nina phenomenon to develop for later on this year. The La Nina being a phenomenon that brings with it excessive rains for the Pacific Rim countries and in terms of coffee, having an impact upon the climatic conditions within Colombia, Indonesia and Peru, while it can also influence dry conditions for the arabica coffee districts in South East Brazil. Thus if the La Nina is to come into play and aside from concerns over excessive rain damage for the coffee crops in Colombia, Peru and Indonesia, it would bring forth concerns over the threat of drought damage for the next 2017 Brazil crop and with carryover stocks likely to be minimal for next year, it is a factor that shall be closely watched by the market.

The May on May contracts arbitrage between the London and New York markets broadened yesterday, to register this at 58.56 usc/Lb., while this equates to a 47.94% 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 25,845 bags yesterday; to register these stocks at 1,491,864 bags. There was meanwhile a smaller in volume 15,845 bags increase to the number of bags pending grading for this exchange; to register these pending grading stocks at 25,965 bags.

The commodity markets had a mixed day yesterday and while the Oil markets had a reversal, the dollar started to weaken and was a constructive factor within many markets, which assisted to buoy the overall macro commodity index for the day. The Natural Gas, Sugar, Cocoa, Orange Juice, Wheat, Corn, Soybean, Gold and Silver markets had a day of buoyancy and the New York arabica coffee market was near to steady, while the Oil, London robusta Coffee, Cotton and Copper markets had a softer day’s trade. The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 0.36% higher; to see this Index registered at 383.46. The day starts with the softer U.S. Dollar steady and trading at 1.427 to Sterling and 1.117 to the Euro, while North Sea Oil is showing a degree of buoyancy in early trade and is selling at 39.85 per barrel.

The London and New York markets had a steady start yesterday and with both markets maintaining this stance into the afternoon trade and with the New York market showing some buoyancy early in the afternoon, before taking tumble and followed by the London market. The New York market did however attract support at the lows and made a steady recovery towards par, but with the London market remaining soft for the rest of the day. The London market ended the day on a soft note and with 69.2% of the earlier losses of the day intact, while the New York market ended the day on a near to steady note and having recovered 92.5% of the earlier losses of the day by the close. The ability for the New York market to bounce back yesterday might prove to be supportive for sentiment and one might expect to see a steady to buoyant start for early trade today against the prices set yesterday, as follows:

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

MAR 1377 – 16                                       MAR 120.60 – 0.25
MAY 1402 – 18                                       MAY 122.15 – 0.20
JUL 1430 – 19                                            JUL 124.05 – 0.20
SEP 1455 – 19                                            SEP 125.80 – 0.25
NOV 1475 – 21                                         DEC 127.75 – 0.20
JAN 1494 – 21                                         MAR 129.75 – 0.10
MAR 1515 – 20                                       MAY 131.10 – 0.10
MAY 1537 – 20                                          JUL 132.10 – 0.15
JUL 1558 – 20                                            SEP 132.95 – 0.15
SEP 1581 – 20                                           DEC 134.30 – 0.10