COFFEE MARKET ANALYSIS: The Slaughter Of The Growers, A Market In Denial?!

DEC 7, 2017–To observe the latest crash in Arabica coffee prices today, with the active March contract at the ICE exchange in New York closing down 3.20 cents per pound at 122.90 c/lb on Thursday, is — quite frankly — an insult to growers. Prices today are trading BELOW the average Arabica prices over 40 years ago where the minimum range were at $1.20-$1.30/lb in the early 1970s. It is outright SHOCKING to read that what used to be serious commodity reporting news agencies such as Reuters, Dow Jones and Bloomberg once AGAIN are allowing their reporters to be completely brainwashed and indoctrinated by the coffee trade’s grand manipulative rundown of figures and green coffee supply trends in production. The current coffee market is in complete denial about how weather is impacting the new 2017-18 crop and unfortunately the reporters for these agencies know nothing or too little about how agriculture and coffee production works in practice to grasp the massive negative impact currently going on. Here’s the basics about what we will NOT see in the next crop season;
–There will NOT be any big crop in Brazil, even less is there any possibility of a “bumper crop” as over 30% to 50% of the flowering for the new crop has turned into LEAFS and not cherries. This has been seen and reported AND confirmed from coffee regions accounting for over 70% of the entire Brazil coffee region.
–Colombia will NOT produce a harvest even remotely close to 14M bags so no help there either.
–Vietnam NEVER HAS produced a crop over 28M bags and WILL NOT DO SO this year either. Over 30% of the Vietnamese coffee park has seen NO replanting or pruning for 30-40 years and a huge part of the remaining coffee park has been uprooted and changed to other crops in the last 5-6 years
–There is NOT even a remote possibility for a “glut” in the coffee market BUT world coffee consumption continues to grow at 2 to 3 percent a year resulting in demand for NEW COFFEE of at least 3M to 4M bags a year.
–World stocks? What world stocks? There are NO world stocks left in producing countries and CARRY ON from the previous harvest is at an all-time MINIMUM while stocks — actual stocks available for purchase by roasters or third parties in the trade and NOT new coffee received in ports which have already been purchased and is headed for their final destinations and use — are UNCHANGED during the last five years at between 17M and 18M bags, less than 5-6 weeks of world demand.
–Petty the poor roasters and buyers who are not yet up to speed on this because the world is running out of coffee!

Please read on for more on the analysis of WHY the market is in DENIAL about supply:

JUN 22, 2017 (SpillingTheBeans)–The you current coffee market is in complete denial about the facts of supply and demand and speculators in the bear camp have successfully managed to indoctrinate junior commodities reporters at Reuters, Dow Jones and Bloomberg to continue to quote them about the alleged “abundant supplies” available to roasters and buyers. This could not be a better example of what constitutes FAKE NEWS in the world of coffee as stocks are at 6-year-lows and all but a few producing countries are producing LESS coffee today than they did 25 year ago, and in that same period world demand has exploded to over 50 percent the volumes than in 1990-92.

Active September arabica prices at the ICE futures exchange in New York closed down 5.55 cents at at $1.165 per pound on Thursday, touching the lowest levels since March 2016 and posting the smallest spread between Robusta prices since 2008. In effect, this means premium Arabica beans at the moment are selling at their lowest price in 35 years compared to “cheap bitter Robusta beans,” said one trader.

All this is very sad news, most of all to the coffee market itself as it’s inevitable that the supply shortage will catch up with the notion of a fake supply buff that does not exist, and when that hit the market roasters, exporters and buyers will be forced to pay up for the premium beans needed for their blend, and this price hike will with certainty be passed on to Coffee Lovers and consumers. At the same time, the current prices will lead to even more coffee growers abandon crops as this price is sharply below the cost of production, and the current speculators are literally slaughtering the very producers at the root of the supply line that their business depends on.

Read of for one of my previous analysis pieces on the topic — A MARKET IN DENIAL!!!

MAY 2016 UPDATE–Climate change continues to cause HAVOC and rampage through the world’s coffee crops from East Africa to Central America, Brazil and South East Asia. Not a single country has gone un-hurt. Brazil had one of its smallest crops in a decade last year but the market is still ignoring that, and the new 2016-17 harvest in Brazil’s Nr 2 producing state of Espirito Santo is for the 4th consecutive crop cycle hit by drought. Without a good crop in Espirito Santo there can be NO BIG coffee harvest in Brazil, it’s as simple as that! Stocks are almost dried up in producing countries and stocks in importing countries are UNCHNANGED from the levels seen five years ago – but 5 years ago the world was consuming more than 15 million 60-kilogram bags coffee LESS than what is consumed today. The El Niño phenomenon is back — yes you remember that unruly little kid? — and El Niño is causing massive damage to coffee crops in East and West Africa, Colombia, Brazil, India, Indonesia, Central America, the Caribbean, Peru and latest also in Vietnam where the key coffee region of the Central Highlands has been hit by the worst drought in 90 years. Yet still coffee prices are hovering around some of the LOWEST levels in over 10 years and WAY below the cost of production. The analysis here was first published four years ago but the basic fundamentals outlined persist, so we ask again, IS

THE COFFEE MARKET IN DENIAL?

BY MAJA WALLENGREN

MARCH 2013 (<em>GCR Magazine)–After several months of reports about the worsening impact on 2012-13 output from Central America from the current outbreak of rust disease, producers are dismayed that ICE futures prices in the New York market have shown no indications of recovering.

The rust outbreak, which is affecting an average of 20 to 30 percent of the entire Central American coffee belt, has come at a time when Latin American farmers are worried about the future of their industry. As tree populations are getting old, unproductive and lower yields have left small-holder coffee farms in a state of semi-abandonment as prices are hovering well below the cost of production at about $1.80 per pound for estates.

Climate change and the El Niño phenomenon has caused havoc to coffee crops across the world

With all these issues at stake and continuing buoyant demand – even though forecasts from Brazil are promising another good crop – the market continues showing such level of defiance against higher price. And even people in the market are starting to ask why.

“It is obvious that we have a serious problem here with the rust disease so why has the market not reacted,” asked Albert Scalla, senior vice president of Miami-based INTL Hencorp Futures, when speaking at the IWCA coffee conference in Guatemala last month.

The sad answer to producers, he said, has to be found in the multiple factors of outside influence driven by the global economy, factors which have nothing to do with the core fundamentals of the coffee market itself.

“Since the events of 9/11 broke loose and stirred panic across the world, in order to protect us against any devaluation of the dollar from rising inflation because of higher demand in raw materials we have been investing more in commodities,” he said, but added this same investments are what in turn have stirred much more vulnerability from outside influences such as the U.S. and Euro debt crisis.

At the onset of the world 2012-13 coffee crop cycle last Oct. 1st the International Coffee Association had pegged the new crop to reach a record 147 million 60-kilogram bags while the U.S. Department of Agriculture said it expected the new harvest to yield 148 million bags. After years of significant difference between the two main official institutions releasing coffee crop forecasts many in the market welcomed a more unified view. This was not to last long, because as the rust outbreak has been taking hold and most of the governments in Central America have announced national emergencies the ICO lowered its figure to 144 million bags a few months later while the USDA rose its figure to 151 million bags citing higher crops in Indonesia, Vietnam and Brazil.

Rust damage in Central America, still continuing as seen here in Costa Rica in January 2015

And so the market is back in the traditional dead-log tug of war between the trade-led USDA and the producer-led ICO with most of the dispute surrounding the issue of balance between arabica and robusta demand.

The USDA has supported bears in the market saying the world’s top producer Vietnam is expected to produce another bumper crop this cycle, while Indonesia is posting a significant recovery and Brazil by most counts is pegged to produce the best off-cycle crop of close to 50 million bags.

The ICO, meanwhile, says that as the rust disease could lead to losses of 2.5 to 3 million bags in Central America and consumption continues to grow by at least 2 million bags a year, these factors could bring the 2012-13 cycle to end at a tight balance with either a small surplus or a small deficit in the supply-demand balance.

There is no denying that flowering for Brazil’s new 2013-14 crop for which harvesting will begin in earnest in May is looking good. And there is no denying that robusta coffee has enjoyed a sharp increase in both demand and prices which have led to a situation of what the market considers to be an over-supply of arabica beans.

“The market has been coming down and we are fundamentally justified,” said analyst Judith Ganes-Chase, speaking at the 10th AFCA convention in Uganda. “I am negative on the market and I still think there is room for a further downside to come,” she said, citing the “massive shift in demand from arabica to robusta” as what gives the market reason to hold on to lower levels for now despite the rust situation in Central America.

Not all in the market agree and many believe that while recent indicators in differentials suggest prices could be on the verge of some recovery, the real issue which has to be addressed is the in-balance of the Arabica-Robusta markets.

“I continue to believe the futures markets are struggling to accommodate the reality of three distinct underlying commodities being served by two exchanges,” said Ric Rhinehart, executive director of the Specialty Coffee Association of America, referring to the competition between mild washed arabica beans, robusta beans and Brazilian natural arabicas.

Given the ever increasing volatility in the supply chain due to the rising uncertainty caused by the impact of climate change many roasters are preparing themselves for what could be much more dramatic needs to adapt increasing levels of flexibility when deciding what coffee to buy almost exclusively based on the availability of supply and price, said a senior trader with a large global green coffee buyer. Add funds’ current net short positions equivalent to at least 5 million bags and any sudden impact could set off a “destructive volatility” in prices, he said.

“Many in the market actually agree with the ICO and we believe the market is becoming too bearish, which is not good for anyone as this leads to more volatility. And more volatility could lead to a situation where coffee just becomes coffee, regardless of the bean type,” said the trader.

This is where the Latin American differentials – the premiums or discounts quoted against the New York Arabica futures and paid in the cash market in producing origin – becomes all the more important.

It was when cash differentials started moving in the opposite direction of the New York arabica market in the spring of 1997 that led to the rally to near historic highs of $3.19 in May that year, just as it was when Colombian premiums started rising in earnest in late 2008 the market was alerted to serious supply problems that eventually would see the market rally in May 2010.

Top quality strictly hard beans from Guatemala have since early February climbed first to levels to about 10 c/lb and then to levels as high as 15 c/lb by mid-February, traders and exporters said.

Nicaraguan and El Salvadoran strictly high grown beans, meanwhile, have risen to premiums of 5/lb after being quoted at around level money for most of the past 4 months. Honduran strictly high grown beans have for the first time in that same period moved back into premium territory at about 2 cents.

“The rust issue can be a real factor on both sides and differentials could get back to last year levels soon once producers sells most part of the current crop toward the end of March in my opinion at which point it’s becoming worthless to tender crop against the ICE. So even if the rust outbreak has ruined some countries more than others, we are going to see certified stock piling slow,” said Davide Rocca, a trader with Genoa-based Italian coffee buyers CICE Spa.

With the only real alternative available for replacements from Central America coming from Peru or natural arabicas from Brazil, many believe this market could be headed for a correction within the next 6 months before the 2013-14 cycle starts in October. Whether this correction will be reflected only in the cash market via differentials or in the futures prices, however, has yet to be seen.

For details and more coffee news, visit; http://gcrmag.com/economics/view/world-coffee-prices-a-market-in-denial
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