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

Coffee Market Report

30 Jun 2016
Despite the modestly negative news of some degree of overall coffee surplus supply for the coming October 2016 to September 2017 coffee year, despite the forecasted dip in the size of the next Vietnam coffee crop, the coffee markets continue to ride on the crest of the wave of overall commodity buoyancy. This rise assisted by the lacklustre nature of the prevailing physical coffee market, where with many of the main industry players well covered for the short term with forward contract cover and export differentials mostly not encouraging for consumer trade houses to take on additional hedged stocks, there is corresponding lacklustre volumes of producer price fixation hedge selling.

Adding to the support factor is the relatively robust nature of the value of the Brazil Real that alike many other emerging currencies, continues to firm against the U.S. Dollar. The Real that had been trading at over 4 to the dollar at the beginning of the year, is trading this morning at a somewhat healthy 3.24 to the U.S. dollar and is eliminating the positive effects of the firmer nature of the international coffee terminal markets, in terms of internal market prices for new crop coffees. This is further assisting to slow the volumes of price fixation selling into the New York market by the countries exporters, to assist to buoy sentiment and value within the New York market.

The question is however what might happen post today’s post second quarter of the year book squaring that is presumably also assisting for some degree of the coffee markets amongst many other commodity markets, as one might foresee that there might be some degree of profit taking coming to the fore. Taking the view that the coffee markets are devoid for the present in any new supportive fundamental factors for the market, as this might indicate that the markets are somewhat overbought for the present.

In terms of weather issues and while a very small chance one might look towards the next full moon that is due on the 19th. July, as it is historically the time that if accompanied by a cold front, that South East Brazil is most vulnerable to frosts. A few weeks ago and with it now twenty two years since there were last any damaging frosts for the Brazil coffee industry, there was something of a wakeup call and learning process for the younger players within the industry that came with the frost threatening cold front in southern Brazil. Thus one might expect to see some degree of caution in terms of players keeping a close eye upon the weather reports for the next three weeks, but by the end of July that issues of frost can be expected to be put to bed for another year.

The September to September contracts arbitrage between the London and New York markets broadened yesterday, to register this at 66.34 usc/Lb., while this equates to a 45.93% 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 850 yesterday; to register these stocks at 1,309,963 bags. There was meanwhile a larger in number 1,700 bags increase to the number of bags pending grading for this exchange; to register these pending grading stocks at 5,631 bags.

The commodity markets had a mixed day yesterday but with the commodity markets alike the global equity markets and with the U.S. dollar tending softer during the day, taking an overall upside path for the day and with the overall macro commodity index having a follow through positive day. The Oil, Sugar, Cocoa, Coffee, Cotton, Copper, Orange Juice, Gold and Silver markets had a day of buoyancy, while the Natural Gas, Wheat, Corn and Soybean markets had a softer day’s trade. The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 1.34% higher; to see this Index registered at 434.20. The day starts with the U.S. dollar showing some degree of modest buoyancy and trading at 1.338 to Sterling and 1.108 to the Euro, while North Sea Oil is steady in early trade and trading at 48.55 per barrel.

The London and New York markets had a slow start to the day yesterday, but with both markets showing buoyancy from the start of the day’s trade and taking a positive track into the afternoon trade, with both markets continuing to take a steady upside track as the afternoon progressed. The positive nature of the coffee markets gained further support from the positive nature of the overall macro commodity index and the lack of producer selling aggression over the markets, to add further value and to take both markets towards a positive end to the day. The London market ended the day on a positive note and with 72.4% of the earlier gains of the day intact, while the New York market ended the day on a likewise positive note and with 91.7% of the earlier gains of the day intact. This close is very constructive in terms of the charts and is likely to be constructive towards sentiment, which is most probably due to set the markets for another steady start for early trade today against the prices set yesterday, as follows:

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

JUL 1696 + 24                                    JUL 142.85 + 3.95
SEP 1722 + 21                                    SEP 144.45 + 3.85
NOV 1736 + 20                                 DEC 147.20 + 3.95
JAN 1745 + 18                                  MAR 149.75 + 3.95
MAR 1756 + 16                                MAY 151.15 + 3.95
MAY 1769 + 15                                  JUL 152.35 + 3.90
JUL 1781 + 15                                    SEP 153.40 + 3.80
SEP 1794 + 14                                   DEC 155.00 + 3.80
DEC 1813 + 14                                 MAR 156.40 + 3.70
MAR 1709 + 14                                MAY 157.20 + 3.65