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

Coffee Market Report

07 Jun 2016

The United States Department of Agriculture Foreign Agriculture Service have come forth with their assessment for the October 2015 to March 2016 crop in Nicaragua, which they have estimated to be 13% lower than their initial forecast due to El Nino induced higher temperatures and less rain over the crop development phase. This lower crop is forecast to reach a total of 1,879,000 bags for this seasonal October 2015 to September 2016 coffee year. The USDA report does however forecast that climate permitting, the next new crop that is currently developing which harvest would begin in October 2016 may be expected to reach over 2,02 million bags in the coming October 2016 to September 2017 crop year.

The United States Department of Agriculture Foreign Agriculture Service have also come forth with their assessment for the October 2015 to September 2016 forecast for the largest robusta producer country, Vietnam. The estimate is that the overall coffee production for this October 2015 to September 2016 production year will remain unchanged at 29.30 million bags this year. The USDA report goes on to forecast that the developing crop that is due to start harvest in October 2016 may be expected to post a decline year on year, with their estimate at this early stage at 27.30 million bags, citing adverse weather conditions and the prospect that the El Nino phenomenon that has past, may be followed by a La Nina, which could traditionally bring heavy and untimely rains to the coffee growing areas.

The weather conditions in South Eastern Brazil have gained some attention recently as light showers have been reported within the coffee growing areas and speculation that the wet weather has some potential to interrupt or delay harvesting and drying of the new Arabica coffee crop that is currently underway. There is however very limited possibility that any degree of damage will be a factor, as the professional nature of Brazils producers along with access to mechanical drying methods will assist to maintain overall steady harvest that is otherwise all on track. The light showers that have been reported will contribute some moisture and at this stage may assist to alleviate any potential concerns of traditional sort as the Brazil winter frost season approaches. This latter factor however with the areas planted out to coffee having moved out of high risk areas over the past few decades, along with the contributory influence of global warming, has essentially become a non-event even within the more volatile and quick to react speculative sector of the coffee markets.

The latest Commitment of Traders report from the New York arabica coffee market has seen the shorter term in nature Managed Money fund sector of this market eliminate their long position within the market over the week of trade leading up to Tuesday 31st. May; to register a net short position of 5,303 Lots. Meanwhile the longer term in nature Index Fund sector of this market decreased their net long position within the market by 1.87%, to register a net long position of 31,224 Lots on the day. Over the same week the Non Commercial Speculative sector of this market squared their net long position within the market to instead be overall net short in the market for the week of trade leading up to Tuesday 31st. May; to register a cumulative net short position of 7,078 Lots on the day.

The latest Commitment of Traders report from the London robusta coffee market has seen the Speculative Non Commercial sector of this market decrease their net long position within this market by 14.18% during the week of trade leading up to Tuesday 31st. May; to register a long position of 9,596 Lots. This net long position which is the equivalent of 1,599,333 bags has most likely to have been further trimmed, following the period of mixed but overall positive trade that has since followed.

The September to September contracts arbitrage between the London and New York markets widened yesterday, to register at 56.98 usc/Lb., while this equates to a 42.65% 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 11,601 bags yesterday; to register these stocks at 1,304,508 bags. There was an increase in the number of bags pending grading for this exchange, of 9,823 bags; to register these pending grading stocks at 22,023 bags on the day.

It was a positive day for the commodity markets yesterday, the leading focus in the markets speculation surrounding the likelihood, or lack thereof for a U.S. Federal Bank interest rate increase. This was tempered during the course of the day by the U.S. Federal Reserve Chair’s speech which indicated a continuation of the current policies and prospective gradual longer terms hikes to come. The news nevertheless, was received positively by the markets with the U.S. Dollar oscillating in response and the volatile commodities sector posted a positive day across the board, with a more steady finish as the U.S. Dollar settled back to steady toward the close of the session. The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 1.43% higher at 426.90. The day starts with the U.S. Dollar trading at 1.4521 to Sterling and 1.1352 to the Euro, while North Sea Oil is steady in early trade at 48.88 per barrel.

The London and New York markets opened the day yesterday with a degree of follow through speculative buying activity and this buoyancy assisted to inspire confidence within the markets. The lack of producer seller participation as this sector stepped back awaiting new highs the lack of volume seller activity assisted the market and the incremental upside triggered buy stops along the way. Both markets maintained these higher levels into the afternoon to set a steady base for the positive nature of the follow on trade, with the funds and speculative sectors of the New York market likely extending their prospectively long position once more. The overall macroeconomic sentiment had a degree of influence as the U.S. Dollar steadied with the support of the latter day more moderate stance of the Federal Reserve and the last quarter of the session registered hefty volume in New York. The return of market sellers made an appearance in both markets toward the end of the day but with underlying buyer support waiting, the close in both markets which registered near to the highs of the day, after a hefty volume day for New York and good volume day in London and a buoyant day in both markets, to set the close yesterday as follows:

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

JUL     1665 + 24                         JUL  131.70 + 4.60
SEP     1689 + 21                         SEP  133.60 + 4.55
NOV   1702 + 20                         DEC 136.15 + 4.60
JAN     1713 + 18                        MAR 138.75 + 4.55
MAR   1722 + 17                        MAY 140.50 + 4.55
MAY   1733 + 16                        JUL   142.05 + 4.40
JUL     1744 + 16                        SEP   143.50 + 4.15
SEP     1757 + 16                        DEC  145.45 + 3.95
DEC    1776 + 16                        MAR 147.25 + 3.85
MAR   1772 + 16                        MAY 148.20 + 3.80