TIGHT STRUCTURE AND MANY QUESTIONS
The growth number of COVID-19 cases worldwide with the sad and frightening situation in Italy being witnessed by all of us forced local and federal governments to lockdown cities and states, implementing social distancing in trying to contain the exponential growth of contamination.
Tests becoming available in several regions caused a significant jump of infected people (liken in the US), giving leaders a strong case to enforce the population to stay home.
People not working, not traveling, causing businesses and hotels to provisionally shutdown have started to provoke layoffs in the most liberal economies, but some measures in several countries are taking place to mitigate the domino effect, such as in the United States where Trump plans to send checks to those who have their income suspended – among further loose fiscal policies.
The FED today said that it will buy an unlimited amount of bonds to keep borrowing costs low as well as it will implement lines of credits to support corporations and governments, but it was not enough to avoid the S&P to sink and settle 30% down YTD – not far from most of the European bourses’ losses.
Commodity indices took another dive in the past five days led by the gasoline contract that melted 42% in the period (or -74% from December 31st until today, ahead of crude oil, -64%!).
Agricultural commodities performed well during the week – apart from corn that has the ethanol component – and the CRB basket had arabica coffee in New York appreciating 17.83%.
Fundamental Focus
The strength of the “C” was fueled by the demand of food in general and by the tight situation of availability in the origins at the moment.
Another issue is the eventual interruption of supply, caused both by the merchants’ closing offices or diminishing the personnel at their purchase points (to preserve the health of its workers) and by potential further decreases of shipments.
In NY the May2020 contract had a sharp rise narrowing even more the structure, with the spread between the first and the second position trading at premium – something that we have not seen since the end of 2011.
Strong demand in the near term influenced by consumers stocking up coffee triggered more buying needs on the spot and the interest in prompt shipments.
Even more so with rumors of ports suspending operations, although operators are working hard to make sure it does not happen.
Not to say that if the quarantine is extended in Colombia and Brazil, during the harvest time, farmers might not have enough labors to pick the beans in time not to compromise the quality.
The risk of an interruption or a slower flow out of key producers turn the attention to coffees “sitting” at consuming nations, whether certified stocks or not, and it could provoke a quicker drawdown of inventories, ultimately making the terminal the “supplier” of last resort.
On the other hand, the discussion on whether or not consumption will be impacted remains quite heated on the social media, with some very reluctantly admitting that it could suffer given the inelastic demand that coffee is known by.
In some data that I dug before writing the report I found that the out of home portion today represents anywhere from 20% to 30% (depending on the country) and while some will drink more coffee at home, which can compensate a bit, I think disappearance will not be able to offset the losses as consumers are also worried about their financial situation.
Also, the third-wave crowd and the new generation appreciate the gourmet coffee shops and the social aspect that it brings together – unlikely to be replaced by virtual conference calls.
There are too many probabilities to consider and no similar occasion to compare.
I still think thought that arabica prices could gain further as it has been performing quite positively in the midst of the turbulence.
If the peak of the pandemic stays behind us in two months with the US dollar then losing ground and risk appetite renewed by the flush of new money printed it shall take coffee along – at least until we finally see differentials converging for mild beans, likely only to occur (or not?) late in the year.
Stay healthy and at home for now!
Wishing you a nice week,
Rodrigo Costa
Skype: rodrigoccosta10
WhatsApp: +1 646 468 7091