“The Mind Sees What it Wants to See”

Andres Agredo, May 26, 2017

52, 49 or 45 million 132-pound bags of coffee will be harvested in Brazil for the 2017-2018 coffee year, according to the numbers already posted by some of the main forecasters in the industry. Who will be right and who will be wrong?
What we do know as a fact is that our neighbor and largest coffee producing country -Brazil- is already being affected by excess of rains, as well as we have been here in Colombia, the third largest coffee producer and second largest producer of the Arabica variety of coffee -which is known for a mild taste and higher quality than its cousin, the Robusta variety-

Recent photos of coffee trees from coffee plantations in South of Minas Gerais, Brazil

Recent photos of coffee trees from coffee plantations in South of Minas Gerais, Brazil

Recent photos of coffee trees from coffee plantations in South of Minas Gerais, Brazil

Recent photos of coffee trees from coffee plantations in South of Minas Gerais, Brazil

Fallen and cracked cherries are some of the damages that Brazil’s coffee crop -which harvest period is already underway- has suffered in recent days. The former represents a loss of the cherries, while the latter an entrance door of fungus, both affecting the quantity and the quality of beans.

These developments, in conjunction with other news, such as the 20% fall in Colombia’s output in April recently published by the National Growers Federation (FNC), the recent statement of its Manager saying that coffee “should” be trading at $3.50/pound,  the analysis published by the Conselho Nacional do Café (CNC) revealing that Brazilian stocks are in their way to hit historical lows, among other news, “should” make the price of the second most popular drink in the world after water, be bullish.

In other words, all these news “should” cause the price of the coffee to rise.

But…  Instead of that, the “C” contract for the nearest month (July ’17) has hit a multi-month low at 1.2915/pound on Thursday, May 25, a level not seen by this futures contract more than a year ago. Markets don’t look worried, probably due to the relatively high current levels of stocks in USA and Europe. Instead, recent rains seem to be seen by some guys as a potential benefit for future crops, a commodity brokerage firm recently commented.

The mind sees what it wants to see, definitely, but photos are real; it’s not imagination.

Coffee C July'17 contract (KCN7) daily chart. Source: TradeStation

Coffee C July’17 contract (KCN7) daily chart. Source: TradeStation

“Coffee prices currently don’t tally with market fundamentals”, said yesterday Carlos Paulino, president of Cooperativa Regional de Cafeicultores em Guaxupé (Cooxupé), a statement that is also agreed by Cesar Osorio -our crop analyst and Quality Director of Laderas del Tapias- as well as by many other local market players close to us from growers to exporters. It’s agreed by myself as well, and probably by many of you…

But this is the harsh reality of financial markets. No matter what asset class. It’s just a matter of buyers and sellers of a given derivative financial instrument and their respective actual strength what determines price. For that reason, even if we are right on our fundamental assessment, we need to be right on our assessment of the forces behind price moves, in order to make money (the ultimate goal of trading): buyers and sellers.

Coffee C Managed Money combined Futures and Options Long/Short ratio.

Coffee C Managed Money combined Futures and Options Long/Short ratio. Week ending May 16, 2017. Source: @degiorgiod

The above chart reflects what International Coffee Organization (ICO) said a couple of weeks ago: “The sudden fall in prices in the second half of April is mainly the result of intensive activities of hedge funds selling off long positions”.  As my friend, Domenico De Giorgio -Independent Financial Advisor- said: “As of today, here and now we are witnessing a moment where speculators are quiet, they are hiding into their small net short. Without the participation of the Hedge Fund/Speculators community, there is no way coffee can rally”.

And I can’t agree more. But one thing is clear: while a MM Long/Short ratio currently at 0.73, being at relatively low levels (compared with levels near to 17 seen early 2011 and late 2014) does not necessarily mean a floor for prices, it does mean that buyers have “reloaded their weapons” and they have at this point enough gasoline to develop a meaningful rally but if and only if, there is a strong enough catalyst that convinces them to do so.

See you at the next post!

Cafe Trading Advisors / Commodity Trading Advisor, NFA Member.

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