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

Coffee Market Report

11 Jul 2016
The latest Commitment of Traders report from the New York arabica coffee market has seen the Non Commercial Speculative sector of this market increase their net long position within the market by 12.93% during the week of trade leading up to Tuesday 5th. July; to register a net long position of 32,792 Lots on the day. This net long position which is the equivalent of 9,296,387 bags has most likely been since marginally decreased, following the period of mixed but overall negative trade which has since followed.

With apologies for perhaps been misleading in the Friday report, we understand that the respected Brazilian analysts Safras & Mercado who had forecasted the new Brazil crop at 56.4 million bags, have last week reviewed this forecast 2.66% lower and to a figure of 54.9 million bags. This figure and with their report that as at Tuesday last week noting that they asses that 52% of the new crop had been harvested and the harvest weighted including the nearly completed conilon robusta crop, would indicate that by then approximately 17 million bags of the new arabica crop had already been harvested. While perhaps by now, this might be a figure closer to 20 million bags of new crop arabica.

Contrary to the news that the Indian monsoon rains this year have been up to average levels and conducive to good agricultural production, the Coffee Board of India have reported that the countries coffee production from the forthcoming new crop shall suffer from poor rains and be 8% lower than the previous crop, with a new crop forecast for 5,333,333 bags. This new crop they predict shall be made up from a 31.25 to 68.75 ratio of arabica to robusta coffees, which would indicate that they foresee that the smaller arabica coffee sector of their industry shall gain some market share during the coming October 2016 to September 2017 coffee year.

What is perhaps interesting in terms of Indian coffee farm yields is that the Coffee Board of India reports that the country has 423,000 hectares of land under coffee, which would indicate with a forecasted new crop of 320,000 Metric tons that they are looking at yields of only a relatively modest 756.5 Kgs. per hectare. This being a yield factor and particularly with the countries production dominated by usually higher yielding robusta coffee, which is well below potential and would indicated that with improved farm husbandry that India has the longer term potential to significantly increase its annual coffee production levels.

The National Association of the Coffee Industry in Mexico have reported that the country which has seen its coffee production hit by Roya or Leaf Rust and various other diseases four years ago and production dip by 49% to 2.3 million bags for the last harvest, is now on a road to recovery. In this respect they forecast a new crop of 2.7 million bags for the forthcoming new crop, with the potential to recover towards crops of in excess of 4.5 million bags within the next three years. These figures for the present relatively dismal crop levels are however somewhat questionable, as there are many trade and industry reports that have indicated that the Mexican coffee crop had been in excess of 3 million bags for the last harvest, but likewise agree that the next crop is likely to be approximately 15% larger than the last crop.

The question is however with clear evidence of significant volumes of Honduras coffee being smuggled north into both Guatemala and Mexico, is how much of the larger private trade and industry past crop figure might be related to the coffee availability that came with these smuggled coffees, rather than to the reality of Mexican coffee farm production. Meanwhile with the Mexican government having committed itself to a longer term program of farm renovation and the sponsorship of coffee farmers to replace aged coffee trees with new disease resistant and higher yielding coffee varieties and with a target of crops of as much as 10 million bags per annum over the next ten years, it would seem that climatic conditions aside that Mexico is indeed on a good coffee production recovery track. Albeit that perhaps the longer term production target, might be seen by many to be somewhat ambitious.

The September to September contracts arbitrage between the London and New York markets broadened on Friday, to register this at 62.59 usc/Lb., while this equates to a 43.44% 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 increase by 435 bags on Friday; to register these stocks at 1,297,352 bags. There was meanwhile a larger in number 5,762 bags decrease to the number of bags pending grading for this exchange; to register these pending grading stocks at 9,505 bags.

The commodity markets were mixed in trade on Friday, but perhaps gained some inspiration from better than expected U.S.A. employment data and to see the overall macro commodity index taking a positive track for the day. The Oil, Natural Gas, Coffee, Cotton, Orange Juice, Wheat, Corn, Soybean and Silver markets had a day of buoyancy, while the Sugar, Cocoa, Copper and Gold markets had a softer day’s trade. The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 1.78% higher; to see this Index registered at 430.14. The day starts with the U.S. dollar steady and trading at 1.296 to Sterling and 1.104 to the Euro, while North Sea Oil is near to steady in early trade and trading at 44.50 per barrel.

The London market and New York markets started the day on Friday with a degree of buoyancy and with both markets adding value and taking a positive track, into the afternoon trade. This remained the track for the day for both markets which took an erratic but overall steady upside track for the rest of the day’s trade, towards an overall positive close for the markets. The London market ended the day on a very positive note and with 94.6% of the earlier gains of the day intact, while the New York market and with some options related support in play ended the day on a positive note and with 90.2% of the earlier gains of the day intact. This close while positive for sentiment and with the charts looking somewhat positive for the London market and neutral for the New York market might however bring with it some fears of the markets looking to be potentially over bought and one might expect to see only a cautious and hesitant near to steady start for early trade today against the prices set on Friday, as follows:

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

JUL 1795 + 35                                       JUL 142.75 + 2.30
SEP 1797 + 35                                       SEP 144.10 + 2.30
NOV 1810 + 34                                     DEC 147.05 + 2.25
JAN 1819 + 33                                     MAR 149.80 + 2.30
MAR 1828 + 31                                   MAY 151.45 + 2.30
MAY 1839 + 31                                     JUL 152.80 + 2.25
JUL 1851 + 31                                       SEP 154.05 + 2.30
SEP 1864 + 31                                      DEC 155.75 + 2.25
DEC 1883 + 31                                    MAR 157.25 + 2.20
MAR 1879 + 31                                   MAY 158.10 + 2.25