Market Watch: January 2019

The chart above of course is not much different from our October report. That being said, the differences we can take into consideration give signals for us to factor into our current quarterly report and analysis as of January 2019.

January 2019 Technical Analysis of the New York Futures Market

The market had a reversal month in September 2018, which was followed by a 30 cent per pound “correction.” This concluded near the seven-year downtrend line. As we write, we can report that for now, the market held the September lows and may be “coiling” in advance of another short covering rally. The year on year Open Interest analysis is much larger (57,000 contracts). Moreover, this indicates the added “short interest” in the market.

The global coffee market has had another three full months to interpret supply and demand projections for the upcoming year. In other words, the downtrend we see is more mature. Additionally, the interest for producers and/or speculators to hedge/add to existing short positions here at historical lows is waning.

Changing Trends as of January 2019

While the overall long-term trend is lower, one can see on the weekly chart that several downtrend lines have been broken. Since the September reversal (with the short cover rally to $1.25), we have yet made a second reversal and can identify a Minor Support Line. Well, it’s minor in that it has just been formed. If the market holds these levels and could break the current downtrend line (at about $1.20), then the minor support would become more significant. If the market could break the last weekly continuation chart high of $1.2550, we would then classify the coffee market as being out of a downtrend. It would then be classified as a neutral-trend market.

The daily chart visibly shows us that the market does not seem to stay at or near $1.00 per pound for very long.  We will once again review the points made in our last quarterly report and report the similarities we’ve made today.

Consider these few factors:

Commitment of Traders had shown the funds and specs short position at record levels (roughly 105,000 lots).  This amounts to roughly 26 million bags of coffee for New York “C” alone.  When combined with London, most expected the number of shorts to have exceeded 35 million bags. Take into consideration that position against any surplus in coffee supply. You could conclude that the sheer size of such a speculative position would not be sustainable. 

For January 2019, the open interest and short sided spec position are not of the magnitude we saw in October 2018. That being said, the relative factors of this position being hard to sustain still exist.  Furthermore, the “most recent short position” had not been reestablished until the market failed $1.20 or $1.15, the house money is much different from last go-around. This was where short positions were very mature and likely established well above $1.50.

For some origins (Brazil, robustas, others), we are above cost of production.  However, for some source countries, particularly the better mild coffee producers, we were and still remain below COP.  We maintain this train of thought and have seen publications that would validate this conclusion. 

January 2019 Macroeconomic Factors

The BR is very influential to coffee prices.  Recently, the Real has broken through the 200 DMA to the upside. We may now see a continuation of better prices for the Brazilian currency.

Source Country Commentary

Brazil

Differentials have remained steady to firm over the past quarter. This is due to the lack of interest from sellers at origin.  Brazil is the largest producer of coffee with the lowest cost of production. Therefore, cash flow at the farm level allows producers to hold coffee until the time when it’s most advantageous for them to sell.  The only way differentials could ease during the remainder of this crop would be a significant rally in the “C” market.  From the availability perspective, the port congestion has experienced relief. Plus, the outbound flow of coffee has improved significantly over the last 30 days.   

Colombia

Differentials for Colombian coffee remain stable to firm.  Export registrations are marginally higher than last year.  The mitaca crop seems to be in good shape, although due to lower net prices to farmers, lack of fertilization is a factor.  Producers/exporters were willing sellers of new crop coffee in the September/October futures market rally. Now, they are reluctant to follow prices much beyond $1.1000.

Centrals

Honduras

New crop has been off to a very slow start. 6% of the harvest has been exported when normally by this time we would see 15%. Due to the crop being late by almost a month, internal prices for coffee have risen. This has made nearby differentials rise.  Compared to last crop, differentials increased due to a combination of the consistently low “C” market and the delayed crop.  With a slight uptick in futures pricing and overall production expected to be approximately 650,000 greater than last year, Honduras is expected to be a more aggressive seller in the coming months compared to other centrals.

Costa Rica

Is set to have one if not the lowest yields in the past 10+ years. Icafé, Instituto del Café de Costa Rica has estimated that the entire country’s production could be close to 1.83 million exportable 46 kilo bags. The West Valley accounts for most of the shortage in yields.  The reasoning behind this thought is due to the strong winds and long rains of 2018 as well as an off cycle year which has caused severe tightness in the market.  Not many suppliers are offering more coffee for new crop until yields come in with more volume at the mill. Price offers have been firm for most of the season hoping to sell at fixed prices rather than “to-be-fixed,” due to the lower New York “C”.

Guatemala

Looking for a similar harvest for this year at approximately three million 60 kilo bags.  Roya is still a concern as the harvest has been under way for a few weeks now with some HB and SHB coffees beginning to ship.  Guatemalan producers and suppliers are also looking to sell at fixed prices with concern of the low New York “C”.  Not many are willing to look at selling their coffees on a differential basis.  So far quality seems very good and we expect that to stay consistent.

Africa

Ethiopia

The rain in October that continued in to early November helped ripen the cherries.  In some areas picking started in November.  Early reports from our suppliers indicate that we will have quality which will be on par with years prior if not better.  There is the possibility the earlier arrivals will compare nicely to last year due to earlier ripening of cherries and processing underway at origin.  We will soon receive pre-shipment and offering samples from Yirgacheffe, Sidamo and also from the Gera Estate in Djimma.

Kenya

Late crop or main crop is well under way as the auction is seeing large volumes of coffees being presented from low quality naturals to high quality cooperative and estate coffees.  Production seems to be on par with last year and prices too seem to be firm looking for the highest price at the auction for high-cupping lots.  We have just seen our first delivery of cooperative and factory traceable lots as well as a great cupping Organic lot from the late crop.  More coffees will start to hit our cupping table as the weeks go on.

Tanzania

Is slowly arriving in the U.S where northern estate lots have been the gems of the season. Over the past few seasons we have seen inconsistency mainly from the southern areas, which seems to be a continued trend overall as well for this year.  The port of Dar es Salaam is jammed with coffees from neighboring countries looking to ship their coffees (Burundi, Rwanda, Uganda) and we can expect some delays yet again from this port. This year will be a bit different from prior years where our focus has been more heavily concentrated on traceable, better processed lots from the north near Kilimanjaro and Arusha.  Watch for further developments as coffees are starting to arrive from February to April.

Far East and Indonesia

This region can sure use a break from its share of natural disasters.  As the Sumatra harvest and exports have started to roll in, we have witnessed fractional relief in the internal market price all while the “C” market continues to trend lower.  Papua New Guinea, Timor, Java, Sulawesi and Bali have all but wrapped up their exports and with the underpinning of the Sumatra so it is our suggestion to insure you have proper coverage into the next six to nine months.

Once again, we reiterate that with the recent lows in the futures markets, our focus here at Royal is aligning ourselves with good supplier-partners who will do their best to maintain quality given the change in prices year on year.

Demand as of January 2019

Roaster interest to extend fixations had diminished during the rally we saw from mid-September to end October.  However, the roaster has shown good interest once again as prices dipped through $1.055 and $1.00 on the C futures market.  Buyers are now extending price protection beyond six months coverage.  

This outline is intended to promote thought and an exchange of ideas.  If you have an interest to share your point of view, please do not hesitate to call your sales rep here at Royal, or you could call me.

Happy New Year and Good Luck Trading!