FORWARD SALES CHANGE THE PRICE RANGE

The UK elections gave Boris Johnson a better-than-expected majority in the House of Commons, finally paving the way for the Prime Minister to take the region out of the European Union, a longrunning soap opera.

The United States and China have announced an agreement on the first phase of the trade-war, which still lacks several details, but immediately suspended the additional tariffs that would kick in yesterday (Dec 15th) and it will reduce taxes on the equivalent of 110 billion worth of imports – in place since September.

Both themes moving forward were probably more than investors could have asked for the end of the year holidays and as a result the S&P500, Nasdaq, Dow Jones, Stoxx 600 and BOVESPA all reached new all-time highs.

Commodities benefitted as well with the CRB above July’s high and at shooting distance from the top of 2019, 197.8879.

Coffee markets have experienced high volatility, on both sides of the Atlantic.

The “C” reached its highest level since September 2017 at US$ 141.50 cents per pound, oscillating more than 1000 points in the past two sessions.

London is still legging the arabica move, although it is getting close to US$ 1500 per ton, but the swing we saw on the Jan/Mar spread was a jaw-dropping one as it went from 21 dollars discount to a 37 premium and back to 14 under in a couple of days only.

Fundamental Focus

March19 contract has risen almost 50% from the low on October 17th. In two months the 45 cents rally has had only a few days of significant corrections, three or four depending how you look at it, with the deepest dive last Friday marking an outside reversal day that was not confirmed today.

Speculation of cash-flow stresses among participants has circulated in the news and forums, pouring more gasoline on the fire and eventually attracting some to fish for upside stops.

Looking at the COT report though, this does not seem to have happened just yet (at least until last Tuesday, the 10th), given that the commercials sold the market even further, increasing their gross-short to a new record – 56 mm bags (70% of arabica yearly exports?).

If someone was in fact stopped out this might have happened on Thursday, given the drop in open interest, and maybe today with the sharp move up and the explosion of the implied volatility.

New York today started under pressure, kind of expected after the weak close and the 1,118 lots of the Jan130 call abandoned on Friday (expiration), but the market worked its way up during the whole session sparking more fireworks towards the end.

BRL recovering helped, although the dollar is still above R$ 4.00, and the overall appetite for commodities as well.

The business flow in the physical remained strong last week as in Brazil a coffee bag reached R$ 600.00 on the spot, a level few imagined would happen in 2019, and on a forward basis the Market gave good selling opportunities to producers.

Also, for all the other origins that are harvesting their coffees the timing for the rally could not be better, but as future markets keep tripping higher sellers retrace a bit seeking to capture even greater prices.

At the same time the sharp price rise of the terminal “misaligns” the cash flow momentarily for those that have bought a lot of coffee, as the coffee purchased needs to be shipped and get paid.

In theory this should be weakening the differentials for current crop, but we are not seeing it given that local merchants/exporters are covering or extend the coverage on their books.

Looking at the second half of 2020, when Brazil will reap a larger crop, there have been generous offers, some a little too much, a sign that prices shall not park at current levels after things calm down.

Even more so if we assume a commercialization between 25% to 30% for the 20/21 Brazilian 20/21 crop, a 10% to 15% for the 21/22 cycle and around 5% for 22/23, naturally the sales’ needs will decrease when Brazil begins harvesting the still expected record crop.

Bulls say there is almost no coffee available to be sold in Brazil, which at first seems very unlikely as one has to consider the carry-over that was not small, but even we accept as being partially true, the coffee has just changed hands, from farmers to exporters, and many shippers are probably carrying coffee for most of their sales of the first half of the year.

All the above together indicates a significant change in the New York trading range, which will probably not go back below US$ 110 cents per pound (therefore solving the supply tightness for 21/22 onwards), but likely it will find more resistance above US$ 140 cents – once time passes and more money flows in the coffee chain.

This is the last report of 2019, a year that is ending with much more interesting conversations than those circulating when the terminals had uninterrupted falls.

I would like to thank all our customers, friends and readers for the inputs, regardless of agreeing or disagreeing with the points raised at this space, as anyway they provoke a healthy and beneficial debate for all of us.

If some of you have not bought coffee from us yet, we appreciate the opportunity once it arises, bearing in mind that Comexim can sell not only conventional coffees, but also all type of certification, being able to create group of farmers that allows you to have traceability and sustainability on the product sold to your final customer.

I wish you all happy holidays with great harmony, peace and a 2020 full of health (physically and mentally0 to help us continue our journey with our family and friends, those near or far from us, inside or outside the coffee market.

See you next year!

Rodrigo Costa

Skype: rodrigoccosta10

WhatsApp: +1 646 468 7091