Coffee

Market Watch: 1/2/2018

New
Year and a Possible New Direction

We enter this
2018 calendar year with a record number of non-commercial short positions in the
New York Coffee Futures market.  The
question that presents itself is; Will the market reward those short positions below
12500 – 12000, or might these short positions need to cover above current market
levels?

Let’s analyze
some global/macro factors that are not coffee specific:

  • The 30-year Bond FUTURE, the bellwether
    indicator of long term interest rates (inverse relationship to yields), lost a
    full handle as we entered 2018.  Lower
    Bond Futures means higher interest rates – which could be an indication of
    inflation.
  • Another indication of inflation would be Gold
    Futures.  Gold futures have quietly
    gained $50 an ounce over the past 10 trading days.
  • Last but not least would be a weaker US
    Dollar.  The USD is approaching the
    lowest levels it has seen in 2 years.
    With the notion that the present administration would like to see a more
    balanced trade deficit – which a weaker dollar could help, we may see continued
    weakness in the USD in the future (bullish for commodities).

A
bearish US Bond futures market, a bullish Gold market and a weaker US Dollar
all indicate potential for a new direction, a change that would have a positive
influence on commodity prices.


Looking at the weekly
charts for both New York and London may also give us an indication of what we
may expect for the next quarter.

New York Arabica Market

(LOOKING BACK
AT THE SEPTEMBER MARKET WATCH REPORT): September
2017:
 Having broken the formidable down trend line
formed since November of 2016, the Arabica market recovered 30 cents per pound
on both fundamental news (lack of available coffee in the mid-summer) and
technical factors (a short covering rally where speculators betting on lower
prices liquidated large positions after the market found a bottom…

I include that passage above as a reminder
of what could happen when traders are least suspecting.  

The graphs below of certified stocks
at ICE Warehouses along with GCA Stock data imply at the least a reduction in
pace of growing stocks at the exchange stores and for non-exchange coffee in
particular.  Included in this report are
conclusions derived from that observation with the knowledge that the short
position of the non-commercial trader is now at a record high for data compiled
last Tuesday, and we can expect that the market will be volatile for the near
term.

ORIGIN NOTES:

·         Brazil:  Brazil differentials
have continued to tighten slightly over the past 4 months.  This tightness
can be attributed to a consistently low “New York C” price.
 Producers/exporters have held back on large volume offers and have the capital
to retain inventory with the hope of seeing a market recovery.  

·          Colombians:  Differentials remain firm, with more offers
coming to the market as producers look to monetize.  However, with low futures prices there are
not many changes to differentials at this time.
This can change, but those changes may not take place until we approach
FND March.

·           Ethiopia:  Ethiopia still has 2016/2017 coffees to sell
and are offering them at discounted prices over the 2017/2018 prices.  New crop picking is still taking place and
will probably finish by early February.  Offer and pre-shipment samples
from 17/18 crop will soon be coming our way to be evaluated. Stay tuned!

·            Sumatra:  Prices continue to remain firm.  With the recent lower prices in the “New
York C” there
has been little if any ease in the internal market price.  New crop demand is strong, in addition to the
reduced yields due to heavy rains at origin causing a persistent tight supply.

·            Robustas:  No different than the differentials seen with
mild coffee origins, robusta differentials have also tightened as the futures
market lost 20 cents per pound from their highs this past summer. The
backwardization we have seen recently has abated and now the futures board
resembles a spot discount, or closer to cash and carry (contango).


CONCLUSION:

The market has given roasters a
chance to extend coverage under 12500.
One may read this report and believe that extending coverage with a
higher base might be prudent but being patient is another choice.  With coffee differentials tighter and the
transference of producer inventories to consuming countries, we can expect to
see at least some additional short cover of the positions previously mentioned
which would give producers a chance to hedge at prices they have not seen since
the warm days of summer.

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,

      Fred Schoenhut

      Royal Coffee New York, Inc.

      (908) 756-6400

“One of the
hardest things to do is to take less when you think you can get more.”


*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