Price is the only mechanism to adjust the S&D
With smaller daily volumes traded, the stock markets in the US had a sideway performance in the last five days, probably waiting for new hints (from Wednesday’s FED meeting?) on the expected July interest rate cut, despite healthy economic conditions in the United States.
Donald Trump tries to keep alive the hope for a deal with China mentioning that he will meet Xi Jinping at the G20 meeting to discuss trade-war issues – Xi might just kick the can down the road until the next presidential election here.
The DXY firmed up significantly this week but did not hurt the CRB index that was helped by steep gains of grains due to wet weather in the United States – just when planting should be in full speed.
Coffee was unable to hold the recent gains after the funds had significantly lowered their short position and with the perceived well supplied fundamental background it has not attract new buyers.
Fundamental Focus
New York is already US$ 10 cents per pound away from the 108.60 that it traded on June 4th and London closed at US$ 119 per ton from the June 3rd high.
To make matters worse, the CFTC report released by the CFTC on Friday does little to inspire the bulls – not to say that bears have more reason to believe they will take the driver’s seat again.
The funds reduced their net short position by 1,748 contracts between June 4th and the 11th, when the market fell by US$ 8.65 cents per pound – in other words, not even buying the market (on a net basis) the speculators were able to avoid the price fall.
The current 39,364 lots net-short book of non-commercials is similar to their short of 38,971 lots from November 27th. Comparing that there the market was at US$ 113.30 cents per pound and last Tuesday it has closed at US$ 99.50, the chances of seeing the “C” contract making a new low seem quite feasible – for reference the BRL is at the same level.
Positive factors would be the potential strength of the Brazilian Real after the approval of the pension reform or a confirmation from the field that yields are smaller than expected for the crop that Brazil is harvesting now.
At the same time, it is hard not to hear someone mentioning about the amount of coffee still available in the big origin…
The USDA released its Annual World Market and Trade for coffee pointing to a surplus of 1.21 million bags in 2019/2020, a cycle where the vast majority of market participants see a deficit. The data is one of the two that is freely provided to the market and it is used as reference for most of the agents, meaning that it does not contribute to change the negative feeling for prices.
Brazilian exports in May totaled 3,519,533 bags, accumulating in the eleven months of the current crop year a total of 37.87 million bags.
Considering that in June shipments should be similar, the more than 41 million bags exported together with 20 million domestic consumption will naturally provoke spreadsheet’s revisions, either on the 18/19 production or on the carry-over – the later perceived to be quite small a year ago.
CONAB reported that on March 31st private inventories in Brazil were at 12.8 million bags – in theory insufficient to supply three months of exports (10 million bags) and consumption (5 million bags). It is true that new crop coffees have been available since the end of April, but would the volume make up for the whole amount used?
At the Word of Coffee, Europe’s SCA event, the enthusiasm was similar seen at the American version, with consumers interested in experiencing unique flavors, seeking product with traceability along with sustainability concepts.
Also, in Berlin two excellent forums (German Coffee Association and 4C) brought together producers, traders and consumers to seriously debate sustainability, an important theme that is even more critical in the current low-price environment, when most producers are not being able to make ends meet.
The difficulty in finding a solution that can help everyone is natural and I believe that one of the fundamental points to address is related to how much consumers are really willing to pay more (or keep prices at levels that support production) without eventually seeking for cheaper alternatives to their coffee experience.
In a free market and in a competitive World, roasters are also being pressured by competitors that given the current lower prices allow some participants that not necessarily hedge their needs to be more aggressive on their offers, eating some market-share from those that have fixed their prices way above the market – even if this is a punctual and temporarily situation.
It has not been invented yet something that replaces the price mechanism of the market to do the job of adjusting World supply and demand – even though many complain about its efficiency.
Technical Focus
Stops in NY shall be triggered if September contract breaches 97.00 cents, which will make then next support levels at 92.65 and 90.05. Resistance is at 100.90 and 105.75. In London downside levels to be observed are 1356, followed by 1311 and 1283 dollars per ton, while on the upside 1428, 1477 and 1563 are key points.
Wishing you a nice week,
Rodrigo Costa
Skype: rodrigoccosta10
WhatsApp: +1 646 468 7091