Coffee Market Report October 20 2016

The traditionally conservative research group Procafe have announced their preliminary 2017 Brazil coffee crop forecast and citing biennial bearing factors, foresee that the next Brazil coffee crop could be 20.4% lower than this year’s crop, at a total of only 39 million bags.  This next crop they forecast would be made up from 8 million to 9 million bags of conilon robusta coffee and 28 million to 32 million bags of arabica coffee.  

There is comment though that the Procafe forecasts are most usually 10% to 15% lower than reality, but one might comment that even if one adjusts this forecast by a 15% factor, that it would indicate a problematic 2017 Brazil crop of only 45 million bags, it would be a deficit crop.   Making note that there were minimal carryover stocks into this year’s new crop and once one deducts 20 million to 21 million bags of domestic consumption, that a 2017 crop of anything less than 50 million bags would point to tight Brazil coffee supply to the consumer markets, for the follow on October 2017 to September 2018 coffee year.   

It is however early days and this report comes to the fore well ahead of the clarity that shall come with the quality or lack of if, of the summer rain season over the Brazil coffee districts.  Which is most likely that this rather dramatically market supportive Procafe forecast, did little to inspire the bulls within the coffee markets yesterday.    Rather that the coffee markets reflected some degree of exhaustion in trade yesterday, with a somewhat predictable negative correction, following the past days of rising value.  

Aside from the Procafe forecast there really was nothing in the way of striking news coming to coffee markets yesterday, with market players now waiting for some more clarity in terms of the Brazil rainfall reports for the coming month.   Likewise, on the medium term and with some degree of clarity expected by early January, for some more defining numbers as to the size of the new crop harvest out of Vietnam.   

The third pillar in terms of global coffee supply is the Combination of the Colombian and Central American new crop and so far, the forecasts are for this new crop to be secure and most likely due to be an overall larger new crop, with most market players foreseeing no threat to longer term supply of the top end fine washed arabica coffees.   However, while this is good news for the higher quality sector within the consumer markets the potential surplus in mild coffee supply would be modest and in the end with global cups to fill, any longer term problems for Brazil and or Vietnam coffee supply, would be aggressively supportive for the markets and one can expect volatility to continue well into the first quarter of the coming year.  

The March to March contracts arbitrage between the London and New York markets broadened yesterday, to register this at 64.73 usc/Lb., while this equates to a 40.12% price discount for the London robusta coffee market.  This arbitrage is perhaps becoming a less attractive factor for the roasters who have considered robusta coffees to be an opportunist discount component, within their mostly arabica coffee blends. 

The Certified washed Arabica coffee stocks held against the New York exchange were seen to increase by 140 bags yesterday; to register these stocks at 1,275,051 bags.  There were meanwhile a larger in number 1,225 bags increase to the number of bags pending grading for this exchange; to register these pending grading stocks at 31,546 bags. 

The commodity markets gained some degree of confidence from improved GDP numbers coming to the fore from China, but with the muscle of the U.S. dollar tending to limit the upside within the markets for the present.   The overall macro commodity index and with support from the Oil markets, nevertheless assisting to buoy the fortunes of the overall macro commodity index for the day.    The Oil, Cocoa, Orange Juice, Corn, Soybean, Gold and Silver markets had a day of buoyancy, while the Natural Gas, Sugar, Coffee, Cotton, Copper and Wheat markets had a softer day’s trade.   The Reuters Equal Weight Continuous Commodity Index that is made up from 17 markets is 0.25% higher; to see this Index registered at 420.52.   The day starts with the U.S. dollar showing a degree of buoyancy and trading at 1.227 to Sterling and 1.096 to the Euro, while North Sea Oil is steady and trading at 51.35 per barrel. 

The London and New York markets started the day yesterday with light selling pressure in play and the somewhat predictable corrective losses for early trade, with the markets maintaining this track into the early afternoon trade.   The afternoon bought with it increased volumes of price fixation and profit taking selling for both markets and with increased losses registered for the markets, but there was a bounce back from the lows as the day progressed and to see the markets finally taking only a relatively modest negative track for the rest of the day.   The London market ended the day on a softer note and with 60% of the earlier losses of the day intact, while the New York market ended the day on a modestly softer note and with only 34% of the earlier losses of the day intact.    This close and with the partial recovery in later trade yesterday while the charts still indicate a positive picture is likely to inspire some degree of caution and one might expect to see a hesitant but relatively steady start for early trade today, against the prices set yesterday, as follows: 

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

NOV     2104 – 21                                               DEC   157.85 – 0.90

JAN      2129 – 24                                              MAR   161.35 – 0.85

MAR     2130 – 22                                              MAY   163.50 – 0.70

MAY     2133 – 20                                                JUL   165.35 – 0.75

JUL      2138 – 17                                                SEP   167.00 – 0.75

SEP      2142 – 17                                               DEC   169.10 – 0.75

NOV     2152 – 16                                               MAR   170.85 – 0.75

JAN      2160 – 18                                               MAY   171.80 – 0.75

MAR     2167 – 18                                                JUL   172.70 – 0.75

MAY     2170 – 18                                                SEP   173.60 – 0.70