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

Coffee Market Report

13 Aug 2015
The traditional Brazil frost season is due to come to a close this coming weekend and following another year of no frost damage, but with many market players and in fact industry buyers having no experience or memory of the last damaging frost in Brazil twenty one years ago. Thus the threat of frost which is always there, no longer has much influence upon the physical coffee market that historically used to see consumer industries taking on precautionary forward cover early in the year.

Focus is now rather upon the Brazil rain season that is due to start at the tail end of next month and to start triggering flowerings towards the development of next year’s new crop and with this six weeks to the fore, one cannot expect much influence from Brazil weather for the short term upon market sentiment. In this respect and with a mild El Nino phenomenon presently in play within the Pacific ocean and with the El Nino usually bringing increased rainfall for south east Brazil, one might suggest that there is presently little concern that the new Brazil spring and summer rain season shall be anything other than a good one and one that might fuel a large new crop of perhaps in excess of 60 million bags for next year.

A crop of this size would perhaps be seen to be bearish for the markets on the longer term, but the reality is that it should not be, as by then and following this year’s deficit crop from Brazil, the carryover Brazil coffee stocks will most likely be very much depleted and there shall be a desperate need for a surplus crop to rebuild stocks for the future. Thus even though the prospects of a good rain season for Brazil for the last quarter of this year and the first quarter on next year is likely to be bearish for the medium term markets, there might be a cautious limit to the extent of the downside that the rains might bring to the market.

Meanwhile matching the longer term prospects of Brazil retaining its dominance of the world coffee supply, the Vietnam Central Highlands Agricultural and Forestry Science Institute continues to forward to the countries farmers good technical farming guidance, along with a host of new higher yielding and disease resistant plant material. To see Vietnam that suffers from limited suitable land availability to cap its already impressive crop potential, produce the world’s highest yields per hectare of mostly robusta coffees. With this comparatively small country which punches well beyond its weight in terms of coffee production and supply, maintaining its position as the world’s second largest coffee producer and supplier to the consumer markets.

Perhaps the longer term significance of this technical and scientific muscle that is being experienced within the Vietnam coffee industry, is the fact that Vietnamese investors are steadily moving into the neighbouring countries and taking with them their experiences of success within Vietnam. Thus in time one can imagine, this shall contribute to rising coffee supply from countries such as Myanmar or Burma, Laos and Cambodia, which would further increase the approximate 33% share that Asia holds of world coffee production, which is still dwarfed by the approximate 57% share held by the American producers and a share dominated by Brazil and Colombia, but is significantly higher than the approximate 10% share held by the host of African producers.

The arbitrage between the markets narrowed yesterday to register this at 57.46 usc/Lb., while this equates to a 42.48% price discount for the London robusta coffee market. This arbitrage remaining relatively attractive to roasters in comparison to arabica coffee prices, but is perhaps due to widen further in time and when Vietnam stocks start to impact upon the fortunes of the London market.

The Certified washed Arabica coffee stocks held against the New York exchange were seen to decrease by 10,232 bags yesterday; to register these stocks at 2,084,361 bags. There was meanwhile a smaller in number 4,950 bags increase to the number of bags pending grading for this exchange; to register these pending grading stocks at 11,930 bags.

The commodity markets were mixed in trade yesterday and with the energy and precious metals markets maintaining a positive track for the day, while most of the rest of the markets took a softer track for the day. The Oil, Natural Gas, Cotton, Copper, Orange Juice, Gold, Silver and Platinum markets had a day of buoyancy, while the Sugar, Cocoa, Coffee, Wheat, Corn and Soybean markets had a soft day’s trade. The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 1.15% lower to see this Index registered at 400.64. The day starts with the U.S. Dollar steady and selling at 1.562 to Sterling and 1.114 to the Euro, while North Sea Oil is steady in early trade and is selling at 48.85 per barrel.

The London and New York markets started the day yesterday with modest follow through buoyancy and with both markets maintaining a positive track into the afternoon trade, but with the markets and particularly so the more volatile and high volume New York market running out of steam as the afternoon progressed. The New York market coming under pressure from the combination of speculative profit taking and producer price fixation selling, against very limited consumer market buying interest and with the New York market triggering sell stops to accentuate the losses and with the London market following suit and attracting negative producer price fixation selling activity. The London market continued to end the day on a softer note but having experienced a partial recovery to end the day with 51% of the losses of the day intact, while the New York market attracted aggressive negative attention late in the day and ended the day on a soft note and with 91.9% of the earlier losses of the day intact. The soft end for the day in New York somewhat defies the positive nature of the charts might impact sentiment for the markets, which are likely to result in a softer start for the London market and perhaps a cautious corrective steady start for the New York market for early trade today against the prices set yesterday, as follows:

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

SEP 1699 – 26                                 SEP     131.85 – 5.35
NOV 1715 – 25                               DEC    135.25 – 5.10
JAN 1730 – 25                                MAR   138.55 – 5.10
MAR 1749 – 25                              MAY   140.70 – 5.05
MAY 1769 – 24                                JUL   142.75 – 5.05
JUL 1788 – 21                                  SEP    144.60 – 5.00
SEP 1805 – 22                                 DEC    147.15 – 4.90
NOV 1824 – 22                               MAR   149.55 – 4.80
JAN 1843 – 22                                MAY   151.15 – 4.60
MAR 1858 – 22                                JUL    152.90 – 4.35