Equity markets settled positively last week on preliminary research that an antiviral (remdesivir) has been accelerating the recovery of COVID19 patients, but today it lost ground carried away by the no-longer valid lesson that I we all learned in school.
WTI prices for May20 contract delivery, which expires tomorrow (April 21st), traded at negative levels, falling 320% at one point – it was also reported negative prices traded in the cash-market.
When we were taught that nothing could be worth less than zero I guess it was left out the calculation the lack of storage capacity for the good in question or the cost of carrying the good when there is no demand for it – and in the futures market some paper-holders that are not able to operate on the physicals being forced out.
Coffee had an episode on its history when the Brazilian government burned and also threw coffee into the sea due to the low prices and oversupply after the great depression in 1929. Brazil, back then, had had three consecutive record crops and its inventories far surpassed its yearly export figures, but as trees were not eradicated the plan lasted several years and some books say that up to 80 million bags were destroyed until the mid-1930s.
The current 20 decade is starting “a bit gloomy” like the last 20 one had finished – we will come out stronger though, as has always been the case.
The IMF forecasted a 3% drop in the World GDP this year, with advanced economies shrinking 6.1% and emerging economies 1% – for Brazil alone the expectation is for a 5.3% fall – all that assuming that the novel virus gets “under control” on the last half of the year.
There remains more questions in the air than answers, as you would expect with an unparalleled event, and to get back to normal traveling and social events, including going to restaurants and shopping, it will depend on how quick there is a drug to kill the virus or the vaccine – meaning it could take more than a year.
In front of this scenario commodity indices remain under pressure and the glut of money poured in the economies might at one point stir up the asset class.
New York coffee has been trading between US$ 110 and US$ 120 cents per pound and London is back below US$ 1200 per ton.
Short-term demand is still somehow active, but not as much as we experienced until two weeks ago, certainly reflecting the consumers slowing down purchases at the supermarkets.
As for the June onwards shipments the industry seems to be studying the best buying strategy given so many variables.
The ICO launched a worrisome study, drawing a correlation of a 0.95 points loss in consumption for every 1 drop of GDP in consumer countries – which if proved to be true it will have a very negative impact on the global disappearance.
For exercise purposes I am working with a zero consumption growth, which will add 3.3 million more bags available on the upcoming surplus cycle (totaling 8 million bags), not very negative to start with, but at the same time it shall discourage bets on the upside – not gloomy for coffee.
Differentials in the main origin have weakened with the proximity of the new crop and with the BRL trading near its lows. As for mild beans the basis is firm and the same for Vietnamese coffee.
Inventories in the US in March fell 288,658 bags, reaching now 6 million bags. More drawdown is being done in April, but shipments out of Brazil shall be healthy as it has been the case for quite some time.
Several countries are releasing plans to get the population back to work, using caution, gear (masks/gloves) and studying measures to keep some sort of social distancing doable. The New York state has extended the lockdown until May 15th and ventilators are being transferred to other states – as the contagion peak seems to be behind us.
Let’s remain positive as governments will be better prepared in the future for threats like the one we are having.
Sapiens have proved to grow stronger and better at every threat it has gone through in the past.
July20 contract in NY hovered near the 100day moving average but lost ground. If it breaks 114.05 cents it could test 109.00 and 104.00. Resistance levels are at 118.45, 119.25, 120.90 and 122.60. London piercing last week’s low, 1,154 will then make the next support at 1,115 – the low for the 10ton contract. On the upside 1,210, 1,226 and 1,246 USD/ton are the levels to observe.
Stay safe and healthy!!
Wishing you a nice week,
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