Technical Analysis of the New York Futures Market

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Longer-term, Monthly, and Weekly charts

This quarterly report may likely be one of significance.  Not only can one see on the above chart that the market has held, with some “forgiveness”, the $1.00 level but now it seems that a reversal pattern for the month of September 2018 has led to a recognizable recovery.

The weekly chart really is not much different from the monthly chart.  It has shown some deceleration of price momentum, is approaching a challenge of longer term downtrend lines and also had a reversal pattern on the chart.

Shorter Term Daily Chart

On the daily chart, one must respect short term factors.  We must take into consideration the market has seen just one week of short covering (not so significant LONG TERM) and has approached the 50% retracement of the May 2, 2018 high to the September 18th low ($1.1330) and has tested the 100 DMA at $1.1214.  This “leg up” may now be due for a correction, but unless current market factors (see below) change, any healthy retracement of this rally would likely be corrective in nature.

Consider these few factors;

• Commitment of Traders had shown the funds and specs short position at record levels of short positions (roughly 105,000 lots).  This amount of short position amounts to roughly 26 million bags of coffee for New York “C” alone.  When combined with London, most had expected the number of shorts to have exceeded 35 million bags of coffee.  Taking into consideration that position against any surplus in coffee supply, a conclusion could be drawn that the sheer size of such a speculative position would not have been sustainable.

• Additionally, for some origins (Brazil, robusta, others) we are above cost of production.  However, for some source countries, particularly the better mild coffee producers, we were and still remain below COP.  Low prices may induce farmer neglect and poor crop care and this will affect differentials and the availability of better quality coffees in the future.

• Add to this, how some coffee producer advocacy groups are speaking of governmental support programs and even minimum pricing and one must strongly consider extending “buy-side” price protection further out the calendar.  (The Brazil Farmers Confederation have asked the government for funding in hopes to avoid selling the new crop harvest at sub $1.00 prices)

Macroeconomic Factors

The support in the Brazilian BR Real has elevated prices for the past week. Much of this move is Real related, not so much US Dollar related.  Traders will factor in the results of the Brazilian Presidential election this past weekend, where candidate Bolsonaro is construed as “bullish: BR Real”.  So with the runoff election due October 28th, we have nearly three weeks of volatility to add to the possibility of some corrections of our initial rally off the lows to possibly feeding more short coverage too.

Source Country Commentary

Brazil  

Differentials have remained moderately firm over the past quarter especially for nearby shipments and coffees landed and offered spot.  A softer futures market along with port congestion and limited availabilityof space on vessels, contributed to firm short term differentials regardless of the large Brazilian crop.  With the recent uptick in both the New York “C” market and the Brazilian BR Real, expect diffs to plateau or soften slightly as farmers interest in selling increases.  

Central America 

Honduras

Compared to last year differentials have only gone up slightly relative to the decline in the futures market.  Producers/exporters have been willing sellers of new crop coffee because once again Honduras will be the largest producer in Central America.  

Costa Rica 

West Valley is expected to have a lower yield this year due to a combination of un-seasonal rains after flowering, pests and strong winds.  These are all major contributors for the expected reduction. The Tarrazu region is not impacted as much and may not see similar losses, although a slight decrease is expected due to a big harvest last year and what they are believing will be an off cycle this year on yield. Offers from origin have changed a little from differential pricing to asking for fixed prices due to recent lows in the market and fear of the market staying near these levels into the shipping season.

Guatemala 

Looking for a similar harvest for this year… approximately 3.5 million 60 kilo bags.  There are two underlying concerns of the farmer for the 2018/2019 harvest; 1) Will roya return again and 2) will prices improve for them?  For many this will determine if they abandon their farms or continue in the coffee business.

Africa 

Ethiopia

Has not started picking.  Please know that weather for the next 6 to 8 weeks will be a big factor for quality.

Kenya

The fly crop has just ended and was small, however it is and too early to tell what the main crop will result.

Far East and Indonesia  

Sumatra has been the strong barometer for Indonesian pricing over the last year as record high internal prices have prevailed. With the new crop upon us, the market is looking for some relief, however initial pricing remains firm as the flow of new crop offers has been sparse. Sulawesi, Bali Blue Moon and Kintamani are making their way to our warehouses, so get your name on some as the window of deliveries is small. Additionally, look for some price ease with recent new crop Timor arrivals.  

At this point in most producing countries crop cycle and with recent lows in the futures markets, our focus here at Royal is aligning ourselves with good supplier partners who will do their best to maintain quality given the change in prices year on year.

Demand

Roaster interest to extend fixations has been constant as market prices eroded through the summer.  Buyers are now pricing through the 2019 calendar.  

This outline is intended to promote thought and an exchange of ideas.  If you have an interest to share your point of view, please do not hesitate to call your sales rep here at Royal, or you could call me.

Good luck,

                Fred Schoenhut

                Royal Coffee New York, Inc.

                (908) 756-6400