Coffee is not alone at low price levels

Investors got excited about the UK finally getting close to an agreement to exit the European Union, causing the British Pound to appreciate steeply in the past ten days.

On Saturday though, the House of Commons decided to require a postponement of departure from the region as most of the members want more time to analyze the details of the deal. Mr.Boris Johnson is trying to secure more votes and send the deal to be voted at the parliament this week still, and the markets seem optimist about his chances.

Commodity indices have moved sideways not being able to react positively to the fall of the Dollar Index.

Fundamental Focus

The Brazilian Real weakened until Thursday, when it traded at R$ 4.18 and, perhaps, not coincidentally the “C” market fell to US$ 92.25 cents per pound. On Friday the BRL recovered and the greenback traded to R$ 4.11 with arabica prices rallying above US$ 95.00 cents. Today (Monday) NY was able to hold, besides the choppy session.

In London, the robusta’s 10-ton contract, which began trading in 2008, has set a new all-time low, falling sharply despite stiff differentials in Vietnam and with the funds further increasing their bearish bets – reaching a new record short-position.

Harvesting at the world’s second largest coffee producer has not yet peaked, according to reports from those who are at the region, while demand for that coffee remains hot. The nature of the market in Vietnam makes one believe that the basis shall stay strong for some time, putting in test the appetite for conilon – at much more attractive prices.

For the “C” the behavior of the dollar should continue dictating the range and in the absence of news we will see some occasional short covering rallies meeting origins selling and on the downward move commercials stepping in absorbing the pressure from speculators.

Meanwhile coffee inventories at consuming countries have risen in recent months.

According to the European Coffee Federation 400,184 bags were added last July to the monitored warehouses, summing up to a total of 12,426,689 bags – up from 11,414,272 bags stored on July 2018.

In the United States, stocks rose 127,925 bags in September to 7,352,234 bags, well above the 6,438,220 bags we had in September 2018 – according to the Green Coffee Association.

In Brazil, August exports remained above 3 million bags, or to be precise 3,232,296 bags were shipped in the month, accumulating 9,982,209 bags in the first three years of the current crop year – compared with 9,160,929 bags that were exported in July, August and September 2018.

The low prices of agricultural commodities have caused protests in many parts of the world, including in Europe where I could see demonstrations in the Netherlands, for example. In France the suicide rate among farmers remain an issue with levels still sadly high – according to Brazilians being one of the reasons that made Macron a fierce critic on the Amazon fires.

Malthus’s theory has proven wrong with population growth finding higher food production, even though there is a great deal of waste that could feed people starving in poor regions.

Governments are striving to avert recession risks with more money being pumped to stimulate economies, but inflation rates are generally low and therefore driving away buying interest on commodities. As several raw materials have no bullish story to provide support, speculators take advantage of selling some that are in contango, like coffee.

It seems like a reversal on the downward trend in coffee will only take place when the pipeline starts drying up, and for that we will need lower exports and inventory usage in consuming countries.

Well, the Real getting stronger would be another possibility and, as usual, a weather disruption, which for now does not concern.

Wishing you a pleasant week,

Rodrigo Costa

Skype: rodrigoccosta10

WhatsApp: +1 646 468 7091