Royal New York

Happy New Year!

In order to plan a bit for the New Year and to attempt to be ready for the new challenges and new beginnings that come with it, let’s take a look at some technical aspects of the coffee market as well as some global financial factors which may have implications to what our coffee futures prices may follow this year.

Market Technicals:
Let’s begin with the daily chart at the top of this page. Coffee certainly has retraced all of the gains from 2014, and still is far from the lows seen in 2008 (1.0160) and 2013 (1.0095). However, what is different this time around can be seen on the daily chart above and also on the chart below.

The market had found support in the past few months “sub-120” but this time, the pressure is more concentrated. This may be partly due to; 1) global economic factors that would mute demand, and 2) value erosion of the Brazilian Real. For the past two months the market seemed to be “bottoming out”, however the selling that took place this week has been formidable. Stop loss selling as well as new short positions initiated by the funds and commodity speculators (born out by the increase in open interest) pushed the market through the late November lows of 1.1530. 2013’s low is far below current levels, but a test of 1.1000 (psychological number and heavily traded options price) should not be unexpected.

The monthly continuation chart above also shows very good support at the technical and psychological level of $1.00 per pound.

One factor that may give credence to the notion the market is approaching “overdone to the downside” is the ICE Certified Stock data. ICE Certified Stocks have diminished by over 1.0 million bags or 37% from the October 2013 levels of 2.738 million bags of certified coffee.

Please understand we are not forecasting a significant low in the market, we are simply pointing out that selling pressure has not been persistent for long periods of time under $1.2000. We can also see that the upside movements have also been restricted, this brings us closer to a conclusion that the market is nearer to equilibrium than a market that could be coiling for a large extended move in either direction.

This most likely represents that, absent market news to the extreme, we are RANGEBOUND with support at the market lows and that extended short covering rallies will be limited, offset by producers selling crops that generally, are at or exceeding expectations.

External Factors:

  • We now have lift off with the FOMC and most indications lead us to conclude that we ought to expect tighter money flows in 2016.
  • This first week of the year has never been harder on equities, but most of the valuation purge and volatility can be traced to China and fears of whether or not they can continue to grow at the pace we have seen these past 5 or more years. Assuming the Chinese GDP takes a breath (not necessarily a bad thing) one might expect softness in US equities, a flight to safety with the US dollar as a lead currency and movement of a percentage of assets to precious metals.
  • With the global economy in a state of flux, add to it the uncertainty of the 2016 US Presidential elections, you will most likely see volatility continue to be prominent in the capital markets and this of course will spill over to the soft commodity space as well as the energy complex.

As with most origins, when producers do not follow the future price to lower and lower levels still, differentials will become more firm. This will be a common theme as we discuss some of the origin notes below:

Brazil:

As the futures market continued lower, exporters chose not to follow along. The expansion of diffs resulted in little physical coffee offtake over the past several weeks. The current pace of Brazil shipments is behind that of last month.

Colombia:

While differentials have widened, we note that Colombia has done a remarkable job reclaiming lost production that they experienced in recent years.

Centrals:

For the most part supply of crops has been steady with some excellent deliveries. Differentials have not followed the future price and Guatemala still struggles with their outturns due to roya.

Ethiopia:

While there is some limited business taking place, for the most part buyers and sellers remain distant as price ideas are separated due to the erosion of futures prices and producers unwilling to follow at this time.

Once again, 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 me.

Good luck and accept our best wishes for a prosperous 2016!

Fred Schoenhut

Royal Coffee New York, Inc.

*The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether trading is a suitable investment. We do not guarantee that such information is accurate or complete and it should not be relied upon as such.

Anthony Chango