Brazil, Honduras worries offer, some, hope for coffee bulls

11.07.2017

The International Coffee Organization flagged some cause for support for coffee prices, as it restated its idea that fund moves appear to have been behind the fall in futures to a 13-month low.

The ICO acknowledged that the "coffee market remains well supplied", factor it attributed to "high export volumes so far during this coffee year and the build-up of large inventories in importing countries".

However, the extent of the decline, which saw New York arabica futures three weeks ago hit their lowest since March last year, appeared to have been driven by somewhat indiscriminate selling.

"The sudden drop in prices during the third week of June seems to have been triggered by co-movement of coffee and other soft commodities, as some reports about technical selling suggest," the organisation said.

Human vs computer trading

London-based Marex Spectron two weeks ago said that "the commodity bear market since 2012 has led to a huge reallocation of assets from managed (human) funds to systemic (computer) funds.

"We can point to $25bn in assets that has been withdrawn from managed funds that historically traded coffee."

Meanwhile, US regulatory data show that managed funds as of June 27 had their largest net short ever on New York arabica futures, of 43,619 lots, although weekly statistics released on Friday showed that easing back to 42,576 contracts.

'Residual risk of frost'

However, the ICO pointed to some potentially cause for investors to inject risk premium into coffee prices, including the seasonal uptick in fears for frost in Brazil, the top coffee-producing country.

"Moving into the month of July, there is still a residual risk of frost in Brazil potentially affecting the outlook for the next crop," the organisation said, with freeze damage having in the past made a significant dent in prospects for the harvest the following year.

At US broker Futures International, Jack Scoville noted that "weather in Brazil has been cold", and that "most forecasts call for cold temperatures to continue".

However, he also noted that temperatures had remained "well above damaging levels" for crops, and that "there is no damaging cold in sight just yet".

Honduras rust worries

The ICO also flagged that "possible outbreaks of coffee leaf rust in countries such as Honduras may raise supply concerns in the market".

The large extent of Honduran exports in 2016-17 has provoked a series of upgrades to estimates for the country's last harvest, in turn weighing on world arabica prices.

Honduran exports for the October-to-May period were 30% higher year on year.

However, there is some debate as to whether the country will in 2017-18 be able to achieve a strong harvest, given that arabica plants tend to operate in alternate years of higher and lower production, and the findings of coffee rust even on some trees which were thought resistant to the damaging fungal disease.


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