Bullish specs getting out of longs

The United States and China have moved forward in negotiations for a trade agreement, with the latter managing to split some of the demands of the former.

Trump’s government has agreed not to raise tariffs from 25% to 30% on the equivalent to US$ 250 billion of imports, which would take place this Tuesday, October 15th. China, on its side, pledged to buy the equivalent of US$ 40 to 50 billion worth of US agricultural products, a relief to US producers, who largely voted for the current president.

There are still missing details on the agreement, but assuming these purchases are annual the volume will be much larger than the US$ 24 billion that was sold by Americans before the start of the trade war.

The stock markets ended the week up, reacting positively to the news with a strong performance on Friday and slightly sideways today.

Coffee had a bitter week, being unable to keep up with the recovery of the CRB and with arabica in NY ending last week as the worst performer among the components of the index.

Fundamental Focus

The flowering in Brazil may have been the major factor on the terminal’s weakness, attracting sales from speculators and forcing the Decembre19 contract to make a new low – on a continuous basis prices traded back to levels seen in September.

On the COT report we noticed that most of the fund’s sales were related to partial liquidation of their gross-long position, 5,051 contracts, while new sales totaled 2,201 lots – between October the 2nd and the 8th.

The commercials gross-long side, where the roasters are categorized, there was new purchases done on the equivalent of 2 million bags during the same period, when prices dropped US$ 5.65 cents per pound.

In Basel, Switzerland, producers, traders and analysts met to celebrate the 10th Swiss Coffee Dinner, and the tone of meetings and informal conversations was friendly for prices while in some of the panels market-participants were doing a brainstorm on how to keep diversity alive on the production side of the chain, where two origins dominate the flow.

Most participants are worried about the problems experienced by coffee producers in the World, but several people were stroke by surprise by the healthy pictures of the trees flowering with some producers, who were at the event, mentioning that the flowering was the best they have ever seen.

On S&D presentations hosts were careful on forecasting how big the next Brazilian crop will be, given the need for the flowers to be fixed, regular rainfall to take place and proper handling by farmers, but even so a record harvest is being expected, especially considering that the conilon production will exceed the 2017/2018 cycle.

Another recurring subject on the meetings and talks was related to glyphosate, a delicate matter (not only in Brazil), but especially in Europe where the limits for coffee are small compared to other countries and compared to other products of great use, such as tea, beans and several vegetables.

A review of the acceptable limits at first seems difficult because it is unpopular and potentially could negatively expose the industry as a whole, however the viability for other solutions becomes even more challenging with international prices trading at levels already below production cost for most of the origins.

On the demand side of things most agents have positively seen a growth in consumption of at least 2% per year, enough to continue absorbing larger outputs.

If one assumes that Brazil might produce 70 million bags in the next cycle – don’t be scared because there are those who say it could be even bigger – by 2020/2021 the surplus will be “only” 5 million bags, low in absolute terms and not that negative.

In 2021/2022 another three and one half million bags will be needed and, on this distant harvest, Brazil will be going through its off-year, at the same time that mild producing countries shall have smaller harvests reflecting the low-price environment. That being said, the deficit could be double the size of what inventory will rise in 20/21.

Of course, the timing is what kills many and we have to convince the funds about it all, which is a tough one when they see low (or negative) interest rates with an attractive contango, sizeable export flows and the terminal failing to hold gains for long. In fact, some had already lost heart to bet on the upside being stopped out on their long side, as per my comment a couple of paragraphs above.

It does not seem to me that prices will fall much further from where they are, but at the same time a significant pull from the terminal will only happen with the strengthening of the Brazilian Real (maybe on 1H2020) or due to some weather event.

In short: we will continue to have more of the same.

Technical Focus

December19 contract in NY bounced from the low on Friday to settle above Thursday’s close and had a follow through day today – short-term positive. Support levels are at 93.05, 92.20, 91.05 and 89.60 while the first resistance is at 97.35, followed by 98.70 and US$ 102.90 cents/lb. London Jan19 contract must hold today’s low, 1,255, to avoid a test of 1,231 and 1,212 (March 2010 low and the low for the current 10ton contract). On the upside 1,314, 1,345 and 1,368 USD/ton are the resistance areas.

It was a pleasure seeing and chatting with many of you in Basel and on your offices.

Wishing you a pleasant week,

Rodrigo Costa

Skype: rodrigoccosta10

WhatsApp: +1 646 468 7091