Is There a Missing Number We Still Don’t Know?

Andres Agredo, June 16, 2017

So it looks like everyone agrees that the coffee market currently don’t tally with fundamentals (talking about the Arabica variety, which is traded on New York exchange), and that recent weakness on futures prices is speculative-driven.

But I’m not comfortable with that reasoning. Is there any “tangible” reason behind it?

In their latest report, the International Coffee Organization “ICO” said: “Coffee prices continued to fall as the market remains well supplied and inventories in consuming countries are high as a result of strong exports in the first seven months of the coffee year”, while Judith Ganes explained further saying that “the rise in coffee stocks in the United States… will serve as a buffer against lower supplies in the second half of the October-September marketing year.”

USA Coffee Stocks

Okay, now we got something to blame for recent weak coffee prices in New York: current high USA inventory levels. And it’s not such a surprise if we look at the historical negative correlation between Coffee C price and the compilation published by the Green Coffee Association “GCA” every month, which totaled 7.115 million bags in May, 2017, the overall highest level since 1994.

Arabica Coffee Price vs Total USA Inventory

I’m sorry, but I’m not comfortable just yet. With a deficit of 10.8 million coffee bags over the last three years (as published by the “ICO”), neither I nor my partners in the growing coffee area understand why those 7.1 million bags in USA have the market so tranquil, lately. My reasoning is that, if we continued in a world supply/demand deficit at that pace (which may be on the cards), the green coffee in USA should be out of stock in less than two years.

World supply/demand balance by "ICO"

So, is that a big enough buffer to be so tranquil?

Whether it is or not, the market is tranquil. Speculators have kept building short positions with Managed Money Long/Short ratio sitting at lower levels, at 0.56.

MM Long/Short ratio by @degiorgiod

Why? Is there something we still don’t know??

While Brazilian harvest is ongoing -which can be one of the causes behind the bearish seasonal period from late May to early June because of the speculation on final numbers- my view is that, the cause behind recent weakness of prices can be for its most part, the one-million dollar question: Inventories in producing countries.

There is no mechanism in Brazil and Colombia -the two major Arabica Coffee producers- to compile and count all the coffee that exists in warehouses, so that we can get a verified number of stocks in main producing countries, as it does exist in the USA.

And it leaves a lot of room for speculation…

Having said that, although USA stocks are not enough to determine the “actual” amount of coffee inventories world-wide, in my opinion, the market seems to need some verified number to stick to, and the GCA’s statistic seems to be the number to watch at this point.

Well, at least for now… until July comes with final numbers about first-half crop in Colombia, as well as more advanced numbers of Brazilian harvest season, which in both countries, coffee growers agree that current high expectations with regard to crop numbers won’t be fulfilled, claiming poor flowering and adverse weather conditions as some of the causes. Will all they be wrong? We will see it soon.

See you at the next post!

Cafe Trading Advisors / Commodity Trading Advisor, NFA Member.

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