Arabica coffee market flirts with bear market territory

07.12.2016

Arabica coffee futures flirted with bear market territory as strong Colombian production, besides further weakening the Brazilian real, further undermined concerns over tightness in supplies.

New York arabica coffee futures for March touched 142.35 cents a pound at one point on Tuesday, down 1.5% on the day, before staging a recovery in late morning deals.

At the session's nadir, the contract stood down more than 20% from its peak a month ago, meeting one part of the definition of entering a bear market.

Typically, however, this process needs to last for two months for a bear market, rather than a correction, to be declared.

Currency factor

The latest decline came as the Brazilian real renewed a decline against the dollar set in train, as with many other emerging market currencies, by the election as US president of Donald Trump.

Mr Trump's policies are seen likely to provoke an increase in US interest rates which could draw capital away from countries such as Brazil, which are also seen as potentially suffering from trade dislocations his administration might encourage.

A weaker real, which stood down 0.5% at R$3.438 to $1, cuts the value in dollar terms of assets such as coffee, and sugar, in which Brazil is a major player.

Colombia boost

However, bearish sentiment was also encouraged by data late on Monday from growers' group Fedecafe showing Colombian coffee output last month of 1.65m bags – a jump of 25% year on year.

While the report, which also showed exports rising 14.6% year on year to 1.25m tonnes, were viewed in part down to continuing market adjustment after a truckers' strike, which skewed figures for earlier months lower, the data were seen as underpinning production hopes.

"This improved performance during the new Colombian main crop harvest… tends to underline the forecasts for a Colombian crop for the 2016-17 coffee year that shall exceed 14.5m bags," said coffee trader I&M Smith.

"A crop that one would think would likewise fuel exports for the present coffee year that shall exceed 12.5m bags."

Fund selldown

At Rabobank, analyst Carlos Mera said: "There has been excellent weather in Colombia and Central America, and we are expecting good product volumes there," with Honduran prospects notably promising.

Meanwhile, in Brazil, "the weather has been very good too", contrasting with fears earlier over dryness which had helped stoke concerns of a poor harvest in 2017 - and in turn fuelled the jump in futures to a two-year high of  179.55 cents a pound a month ago, for New York's March arabica contract.

The mix of improved production hopes and a weaker real has encouraged selling by funds which as of the first week of November had lifted their net long in New York arabica futures and options to a record high of 59,252 lots.

That managed money net long has now declined to 43,069 contracts, according to latest regulatory data, accurate as of a week ago.

The fund data "tell everything we need to know about why the market has gone down", Mr Mera told Agrimoney.com.

'Gloomy  prediction'

Mr Mera added that chances looked slim for arabica coffee futures to recover lost ground, without the onset of a further weather setback.

However, separately, Commerzbank flagged the potential for funds to renew arabica buying given that 2017 should see a lower Brazilian crop, given that it will be an "off" year in the country's cycle of alternate higher and lower production years.

Fund sentiment "could change if greater attention starts to be paid to those who believe that 2017 will see a much poorer crop in Brazil, this being the low-yield year in the two-year cycle.

"Yesterday, for example, the agricultural trader Olam announced its gloomy prediction that Brazilian coffee production could decline to a six-year low in the coming year."

Arabica vs robusta

The arabica selldown has also not been reflected fully in futures in robusta coffee, output of which has been badly hit by dryness in major producing countries, including top growers Vietnam, Brazil and Indonesia.

The US Department of Agriculture's Hanoi bureau overnight cut its estimate for Vietnam's coffee output in 2016-17 to a four-year low, and forecast coffee exports tumbling more than 4m bags year on year.

Robusta coffee futures for March stood at $2,036 a tonne on Tuesday, down 0.3% on the day and down less than 8% from their high a month ago.


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