18 May 2020

This week, coffee prices fell an even 3 cents to 107.75 basis the July contract as of Monday. The main driver behind the negative performance continues to be the meltdown in the Brazilian Currency. The Real went as high as 5.90 last week as the country approaches total chaos with governors and health ministers going in full opposition to the Brazilian president, who supports a return to normal life despite the country’s health system teetering at the edge of collapse. With a devaluation of 42% since the beginning of the year, a farmer selling a bag of coffee now gets amazing returns in local currency. With the harvest of the new, on-cycle crop approaching quickly, farmers are extremely eager to sell. The issue seems to be a lack of buyers. US green coffee stocks in April surprised largely to the upside, posting an increase of 494,299 bags (or +8.2%) on the month. This is the largest single month stock build since July 2012 when prices were collapsing as the coffee market transitioned from a deficit to an oversupply.  While the numbers are slightly overstated due to the addition of a new port (Savannah, GA) to the stock survey, the increase is nevertheless telling of the magnitude of the demand shock that has occurred as a result of the COVID-19 shutdown. 

11 May 2020

This week, coffee prices showed resilience, rallying 5.55 cents to end at 111.65 as of Friday basis the July contract. The reasons behind the rally seem to be fundamental in nature. Physical coffee prices continue to be much higher than should be expected for this time of the year everywhere except Brazil. Also, ICE Certified inventories – the coffee one would receive when taking delivery of a futures contract – are continuing to decline. These apparent signs of physical tightness in the coffee market are of course juxtaposed by the commonly held view that coffee demand is suffering due to the COVID-19 pandemic. Nevertheless, these apparent physical signs seem to be enough so far to keep the market holding above the critical $1/lb threshold. On the other hand, the possible upside from any physical tightness is likely limited due to weak currencies and lack of forward buying from roasters.

4 May 2020

This week, coffee prices continued on a negative note, falling 1 cent to finish at 107.2 basis the July contract as of Monday. The Brazilian Real has continued to be the main subject in the market, as devaluation continues while President Bolsonaro escalates his feud with health and safety officials in the country. On Brazilian farms, the cherries are in final stages of ripening and weather looks perfect. While some labor concerns are possible, the high prices farmers get for coffee in local currency ensures that everything will be picked, even if there is a slight delay. On the destination side, many coffee market participants are now weighing in on the impact of the pandemic on coffee consumption. While opinions differ, no one’s answer is that consumption is higher. When assessing impacts on price, however, the devil is in the details. As an example of some details, please see ICO’s published report on this study. You can also see our discussion with the ICO regarding this subject.

 

27 April 2020

This week, coffee futures continued down a downward path falling 9.05 cents from Monday to Monday to end at 106.20 basis the July contract. The major reasons for the rapid move down can be explained by three factors. First, the Brazilian Real devalued by 7.6% in the same time period to record highs at 5.72 Reais/USD as of Monday. The drive behind the devaluation of the Real has been president Bolsonaro’s response to open the economy despite, ensuring the ouster and resignation of several top-level officials. Second, risk appetite seemed to have returned in the markets, with the US government injecting cash flow into the economy to support it during the pandemic. This injection has led to a stream of positive investment in the stock market, while the reality of lower demand for goods has resulted in the opposite investment for commodities. Finally, from a coffee specific perspective, a break of some technical signals last week initiated a wave of momentum based (CTA) selling, showing that technical models are also starting to reinitiate investments after pausing or limiting investment during the unprecedented times of late March. 

20 April 2020

This week, coffee futures finished 5.35 cents lower from Monday to Monday to end at 115.25 basis the July contract. Macroeconomic forces continue to weigh down on the coffee market, as a perceived global oversupply in the broad based commodity complex is forecasted due to the economic slowdown caused by COVID-19. This oversupply is most easily illustrated by WTI crude prices falling below $0/barrel for the May contract. This doesn’t mean that crude is free, and has to do more with contract specifics of storage space in Cushing, Oklahoma. Nevertheless, oil is an example where demand destruction has reached such an immense level that big oil companies pay to have someone take crude oil off of their hands (the physical commodity is worth less than the cost to store it). And while financial investors throw coffee in with the rest of the commodity complex in their short (bearish) trade, we believe that demand destruction did not occur to the same extent in the coffee sector. Supermarket scanner data is revealing continued growth in coffee sales. Online sales of coffee are exploding, and by some estimations are alone enough to offset lost café demand. Lastly, the supply side of the equation for coffee is becoming more challenging. For example, Brazilian farmers are seeing a rush on mechanized harvesters due to the fear of not enough workers being available to harvest coffee this year, due to pandemic risks. With less availability of workers to harvest an upcoming record crop, Brazil will leave cherries on the trees far longer than is optimal, leading to a big quality risk. 

13 April 2020

This week, coffee futures rose 2.7 cents from Monday to Monday to end at 120.6 basis the July contract. The main highlight of the week were that prices continued to remain resilient in the face of the ordinary congestion that typically happens during the roll from May to July. As futures approach expiry (where if you’re left holding then you would have to prepare to take or deliver exchanged certified washed arabicas), most players who have physical hedges for inventory buy the May futures (to cancel their existing shorts)  and sell the July (or roll their shorts to July). This action creates some downward pressure on futures typically. As prices did not succumb to the downward action of the roll, suggests that further upside can be expected. 

6 April 2020

This week, coffee prices collapsed, falling 13.95 cents from Wednesday to Wednesday to finish at 116 cents basis May contract. While the main driver behind the fall was the widening spread (difference between current and forward futures contracts), several macroeconomic factors also contributed to the price decline. First, is the Brazilian Real’s move out to new highs of 5.20 mid week (from around 5 Reais/1 USD last week). With the Covid-19 outbreak beginning in Brazil, president Bolsonaro’s response has been lackluster, and chances for fiscal conservatism during this crisis became less likely. Also, more and more people are discussing the impact of the loss of coffee demand due to the outbreak. I have a mixed view on this. On one hand, out of home consumption (roughly 25%-33% of US consumption) is estimated to have dropped 80-90% nationwide, this week, grocery stores reported absolutely stellar sales results. Ground coffee sales grew by 30.5% and the single serve coffee category grew by 27.3% over the last month compared to one year ago. Of course, the major storeshelf brands tend to be the larger commercial (canned) coffee varieties, which contain a higher mix of Brazilian Naturals and Robustas than washed Latin American milds. Time will tell whether this coffee will sit in the pantry or will be drunk and repurchased, but I believe that coffee demand will be more resilient during this crisis than many financial analysts expect.  

30 March 2020

Last week, I wrote a lengthy piece on the impact of spreads on the coffee market. This week, I am continuing on the same theme, highlighting how the relationship between near term and longer term supply can have immediate effect on futures. This week, prices oscillated violently, going as far as 10 cents higher, but ending the week only up 2.7 cents at 119.30 basis the May contract as of Monday. Coffee spreads were even more volatile, moving as far in as -0.9 cents for the year’s worth of contracts on Wednesday and as far out as -4.95 cents on Friday. The range in the spreads are smaller, but are more important, as they theoretically reflect the market’s willingness to hold coffee for one year (the more negative the number the more the market pays you to hold the coffee). For a trade house, assuming average storage rates of 1 cent per pound per month accounting for coffee age as well, the cost of 12 cents per pound to store the coffee would be offset by only 7.5% by spread gains on Wednesday, but by 41% as of Friday. To give some context, the average 1 year spread in coffee in 2019 was -13.4, meaning that in the same situation, the trade house would make 1.4 cents by holding coffee for 1 year. When spreads move in so violently, coffee becomes like a hot potato, with holder’s incentives changing overnight to “sell now”. As trade houses sell coffee (which, at least for commercial brands is very much in need to support supermarket shelf demand), they sell their hedged physical spot coffee, which has a short futures leg. To complete the sale, the future has to be unwound, or bought. More futures buying leads to higher prices. 

23 March 2020

This week, as the world continues to struggle with the continued spread of COVID-19, coffee futures completely decoupled from outside markets and started trudging their own course. Futures ended up 13 cents to finish Friday at 119.75 basis the May contract. Many believe that the most important driver of this price rally has been spreads. Calculated as the difference between the current futures contract and a more deferred (farther away futures contract), the spread is an important feature of commodities markets, as it helps to ascertain the cost or benefit of carrying coffee. For example, if the spread between May 20 contract and May 21 contract was -12 cents, one could buy a container of coffee, carry it in a warehouse for one year at a cost (of say 8 cents), and by hedging the spread at -12, be able to make 4 cents of profit. Of course, by May 21, the same container of coffee will be 1 year old, but that’s another story. In the situation above, the market is in what’s called “full carry”, where it pays an owner of coffee to carry this coffee for longer, showing to the larger market that perhaps coffee is in undersupply. What happens in the opposite situation? If the spread between May 20 and May 21 drops to -2 cents, then the same holder of that same container would lose 6 cents by carrying that coffee for one year (and also be stuck with 1 year old coffee at the end). This situation highlights a market that is incentiving owners to sell coffee now instead of holding it longer. What happens if the May21 actually falls below May20? The holder would lose the 8 cents of carry cost and also lose on the spread. This scenario, called “backwardation” typically occurs during a shortage of coffee, as the value now is higher than the value later. This week, the 1 year spread went from -8.9 cents to -5.75, and the May/July spread actually backwardated for 1 day. This highlights significant supply tightness in the coffee market to the rest of the investing world. When supply is tight, it makes sense to buy futures. That is why price went up this week. 

16 March 2020

In the most difficult week for financial markets over the last 12 years, coffee prices held up surprisingly well. Largely buffered from the rapid macroeconomic downturn, prices settled only 0.65 cents down week on week to end at 106.75 basis the May contract as of Friday. Clearly, excruciatingly negative macroeconomic forces are weighing on coffee prices. As it relates to coffee consumption specifically, it is undeniable that we are expecting a slowdown in out-of-home coffee consumption, which will weigh negatively on prices. Hotels, restaurants, and cafes (HoReCa in analyst jargon) are expected to see massive declines in coffee usage over the next coming months of government and consumer imposed quarantine measures. However, on the upside, we foresee in home coffee consumption to be rapidly expanding. Anecdotally, supermarket demand for coffee has increased so much that some roasters resolved to panic buying last week to meet shelf demand (further raising coffee differentials in the spot market). Unfortunately for the specialty coffee industry, the buying so far has shifted towards the previously disappearing category of cheaper, commoditized brands that come in cans. I certainly believe that this period of history will be transformative in many ways for the world and the coffee industry. In my opinion, we will see a revival of the in-home consumption category aided by online purchase and delivery options. Similar to the way single serve (K-cups and Nespresso pods) reinvigorated the market following the “Great Recession”, I am excited to see what type of coffee innovations can come from these difficult times. 

4 March 2020

After developing some surprisingly positive momentum, coffee futures collapsed faster than they rallied, dropping 10.85 cents in two days to finish at 111.35 basis the May contract, but still up 1.6 cents week on week. The positive forces brewing in the market are still very much in play. Availability of fresh Latin American washed Arabica is lacking unless one wants to pay near record prices in terms of differentials. However, the while the Arabica market may have been able to shake off some of the stock market blues last week, it could not hold off a historic breakout in the Brazilian Real. When the Federal Reserve reduced interest rates as an emergency response measure to counteract negative effects from the Coronavirus, global markets counterintuitively took it as a negative signal. After an initial bounce, the stock market collapsed further and people pulled out of emerging market assets, such as the Brazilian Real. Without the Brazilian government willing to step in and buy the Real (they believe that a weaker Real is beneficial in the long term as it makes Brazilian exports cheaper relative to the rest of the world), we broke a key psychological level of 4.5 and traded as high as 4.65 on Thursday. As the Real weakens, Brazilian farmers get nominally higher prices and therefore sell coffee to exporters who then buy the physical coffee and hedge (sell) futures. 

2 March 2020

The Coronavirus hit mainstream markets, highlighted by the fastest and largest collapse in US equities since the 2008 recession. Many expected a correction to occur for some time, yet the speed and strength of the correction caught many investors off guard. I am now getting as many inquiries about the stock market as I am about coffee (stock market advise is free with every purchase!) The coffee market has also been extremely exciting last week and warrants its own mention! Arabica coffee was the only commodity to finish the week with a gain, going up 8.7 cents from Monday to Monday to close at 115.6 basis the May futures contract. The resilience of the coffee market last week was clearly noted by investors with even a cursory interest in commodities. As a potential store of intrinsic value should the global economy continue to melt down, commodities (especially gold) are often seen as a good place to park money in times like these. Arabica coffee is even more interesting to the basic investor because it “has a story at the moment”. The story is that physical prices for coffee at origin are far higher than where the futures market is trading. This difference, termed “coffee differentials” is far higher than it has been in the past, and is indicative of a shortage of coffee outside of Brazil, or at least a need for an upward price corrections to lower that difference (by making farmers more willing to sell). Monday, a positive trend in the larger market place has meant even more eager buying flowing into the coffee market, suggesting that we are only beginning a more extensive rally. 

24 February 2020

Macroeconomic factors seem to be battling coffee-specific factors in the futures market this week, which fell 1.1 cents on the week to end at 110.25 basis the May contract. On one hand, news of the Coronavirus spreading quickly outside of China (namely in South Korea and Italy) has every investor activating panic mode early this week, which included a big sell order for coffee futures on the opening bell. The realistic impacts of coronavirus on coffee demand is negligible thus far, as China (containing 97% of current Coronavirus cases) consumes only 1.8% of the world’s coffee per year. The largest possible impacts on coffee consumption could come from the imposition of quarantines on major population centers, which would greatly reduce demand at cafés. However, even for South Korea and Italy, we are still far from these types of restrictions. In terms of coffee-specific drivers, things seem more friendly for prices. Prices of coffee at origin continue to dislocate from futures prices via higher differential pricing, suggesting a meaningful supply issue for washed arabicas may be in the works. Moreover, hedge funds continue to sell futures without having a meaningful impact on price. This suggests that significant buying interest exists for futures in the low 100 cent range. 

19 February 2020

In two days that looked like a flashback to Dec 2019 (when coffee prices jumped 40% in the span of a month), prices on Thursday and Friday rose 8.6 cents, to finish up 10.85 cents on the week at 111 cents/lb basis the May contract. With the March-May congestion from the roll behind us (when funds sell the market to move their positions forward one future contract), some serious buying emerged. The idea that has been circulating in the market was that coffee differentials at origin were approaching unsustainable levels for ordinary business. To recap, differentials are a premium or discount offered for a specific grade of coffee above that of the futures price. Many coffees outside of microlots and fair trade certified coffees are priced off of this mechanism. When futures prices fall, differentials typically rise as farmers are resistant to sell their coffee at lower prices. Across millions of producers, this resistance is a sign of tightening supply. Clearly, if supply was ample, farmers would be more desperate to unload their coffee regardless of the price environment. For roasters, differentials are even more important as many commercial green buyers are judged by their performance in buying quality coffee for the best differentials possible (relative to their competition). Therefore, the most optimal resolution to this stagnation in business where farmers don’t want to sell and roasters don’t want to buy is that the futures price has to go up. But as financial markets go, just because it is logical, doesn’t mean it necessarily happens without someone taking action. From Thursday and Friday’s market rise, it seems that someone has indeed taken decisive action by buying a lot of futures.

11 February 2020

This week, coffee prices fell 4.3 cents from Friday to Friday to close at 98.35 basis the March contract. All of the selling really came on Monday, as a class of hedge funds called CTAs, who sell on the back of price momentum finished exiting their long position, and started to go net short. The initial selling created panic which was further spurred by the tenuous macroeconomic situation resulting from the spread of the Coronavirus. This resulted in some investors who had held on to a long position since the rally in December, to finally liquidate their position as those gains turned into market losses. For the rest of the week, the coffee market was largely quiet as some serious buying interest emerged that helped to counteract CTA selling. This upcoming week, the focus will start turning toward the May contract. As market participants most often do not actually deliver or take physical product from the futures contract, continuing a position in coffee will mean getting out of the March contract and getting into the May (called rolling your position).

04 February 2020

This week, coffee prices, like all other commodity products were affected by the Chinese Coronavirus outbreak. Futures basis the March contract fell 8.95 cents from Wednesday to Wednesday, as news of the new virus spread malaise across all markets, sending investors into protection or “risk-off” mode. As of writing, there are 8,246 recorded cases of Coronavirus, of which 8,123 are in China. While these numbers are exceptionally small for a country with a population of 1.4 billion, the rapid spread of the virus has many officials concerned. From a financial standpoint, the cost of containment is what is being priced into markets at the moment. For example, during the SARS outbreak in 2003, Crude Oil demand dropped by as much as 500k barrels/day as the Chinese government placed restrictions on travel. Travel restrictions and health laws are already affecting coffee specifically, as Starbucks has decided to shut down more than 50% of its stores in China. As travel restrictions continue to be imposed, China- a country that is increasingly supported by consumer spending as opposed to industrial production – becomes more and more economically paralyzed. We hope that the medical community as well as government health officials are able to contain this plague and find successful treatment options for those affected.

14 January 2020

This week, coffee futures continued their sharp decline, falling more than 7 cents to close at just below 115 cents/lb as of Monday’s close. The main driver behind this sudden and sharp collapse has been the increase In the amount of coffee ready for grading on the ICE Arabica exchange. As in any commodity futures contract, ICE Arabica is backed by an actual physical supply of coffee that can (but is not necessarily) exchanged during the delivery period. This means that a holder of 1 Arabica future taken to the end of the delivery period would receive 37,500lb of coffee under the guidelines of the ICE Arabica contract. The total sum of coffee held under the guidelines of the ICE Arabica contract are called the ICE Certified stocks. ICE Certified Stocks, which currently stand at 2,065,315 bags of Washed Arabica coffee, are highly visible to the market, and are therefore treated as highly liquid surplus coffee. As a physical product, ICE Certified stocks serve as a cheap source of low-quality washed Arabica that often act as a last resort in case of pricing or supply issues with coffee at origin. In 2019, when prices were massively suppressed, prices at origin became more and more expensive via differentials, thereby making the alternative ICE Certified stocks more attractive. Part of the reason for the late 2019 increase in futures was the assumption that prices needed to go up to make coffee at origin more lucrative to use than ICE Certified stocks, or else the market risks of running out of the specific product that underlies the futures price. At the very end of 2019, 129,000 bags were put up on the exchange for grading, or testing to see if the coffee can become part of ICE Certified stocks. This signal to the market, showed that perhaps prices going from $1 to $1.32/lb had done their job at freeing up excess coffee to enter the exchange. Last week, as prices continued sliding, a further 56,000 bags were put up for grading, showing that even at 1.17/lb coffee was finding its way to the exchange. With the market clearly building its readily available coffee supply, any concerns about coffee supply can quickly be negated, thereby significantly dwindling bullish confidence.

7 January 2020

Coffee prices collapsed 1.15 cents on the week and are down nearly 5 cents on Monday at 122 cents/lb as of writing. The first week of the year started out on a bit of a sour note, as a US drone strike in Iraq killed an important Iranian general. The increase in tensions and potential escalation into armed conflict sent money flows scattering towards safe assets. Unfortunately for coffee, this means that the strength we have been seeing in the Brazilian currency has been abated. Speculators betting on less Brazilian farmer selling due to appreciation in the Real seem to be getting it wrong, and are starting to head for the doors. To bring in more downside pressure, the Bloomberg Commodity index is expected to sell between $362 and $541 million of coffee futures this week, as part of their annual portfolio rebalancing. While this is typically well published in the market and is largely a result of coffee futures increasing more than other products in 2019 (ending the year with 25.7% returns vs. 8.5% average for the Commodity Complex), the actual rebalancing could not come at a worse time. Instead of buying into the Index rebalancing, speculators seem to want to get out of their long investments due to geopolitical pressure.

24 December 2019

Coffee futures rose 0.4 cents to 133.7cts/lb from Tuesday to Tuesday in incredibly wild action that was unlike anything the market has seen in the last 5-6 years. Last Tuesday to Thursday saw prices rise steadily on the back of continued momentum buying, rising 8.85 cents in 3 days with little resistance. A typical bull market. It is so strange that animals, specifically Bulls and Bears, have come to represent market dynamics. As the popularity (or infamy) of the Bull statue on Wall St shows, these animals are the best representation of situations such as the one we are facing in coffee today– strong, brash, and often thoughtless. Charging forward at increasing speed, it sweeps away any who dare oppose it. Many players agree that there has been no specific reason that coffee prices should have continued rising these last few weeks, but they kept rising nonetheless. As soon as the Bull stops running, however, he is vulnerable, and on Friday, we saw the Bear take over. The Bear, unlike the bull, is often nervous and skittish. Bears in the wild prey upon weaker animals and tend to avoid conflict unless cornered. Once cornered, they can be extremely vicious, tearing apart their opponents in blind rage. It is inadvisable to run once you see a bear in the woods, as they will often give chase. In the same vein, the coffee market saw a slowdown in buying on Friday and held off a critical level of 140 cents/lb. Then the bear came out. In the next two hours, we saw prices collapse 11.1 cents, the largest single down day in 4 years. Everyone went into the weekend thinking the Bull market was defeated and prices were headed lower in a straight line. They were extremely surprised to find Monday, that prices regained steadily throughout the day, climbing 12.05 cents in the largest daily gain in 5 years. Today, we saw the bear take over again, with prices falling 7.8 cents from today’s open to the close. Clearly, we are witnessing a battle taking place in the market as the bull fights the bear for dominance. Our experience tells us that the bear’s emergence most likely means this rally is nearing its end, but at the moment, we’d rather drink eggnog on the sidelines.

About Our Market Report

Ilya Byzov, Quantitative Trader at Sucafina North America (SUNA). Byzov began his career as a trainee in market risk. After over three years of Friday “culinary explorations” with co-workers who worked in green coffee trading, Byzov transitioned to the world of green coffee. He joined SUNA about 1.5 years ago. When he’s not hard at work interpreting the market, Byzov enjoys running with his dog and making paella.