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Friday, October 19, 2007

Rain in South East Brazil

Finally rain in the South East regions of Brazil.

Now the question is: how much rain? Will it be enough for an healthy coffee flowering season?
The December Arabica Coffe futures contract in NY was hit by a wall of sell stops with speculators reducing their huge position (42K net contracts long as of October 9): I think that during this week sell of speculators could have reduced by at least 10K contracts their net long holdings, that means the Coffee market could now be less vulnerable (after all it lost 10% in 3 days) but I seriously doubt it can climb back to last week highs: speculators are still too long on an historical basis, I expect coffee to stabilise around current levels (i.e. 1.25) for the next few days waiting for a clearer picture on the status of the next Brazilian crop after these days' rain.

Monday, October 15, 2007

Coffe market update, Oct-16

Last Friday ICE December coffee futures tested again the 140.0 level and finished on a strong note on Brazil dryness worries and lack of Brazilian producers selling pressure due to a Brazil national holyday. Also, Friday evening latest COT report suggested that spec long position are getting close to an all time high. Brazil held one million bags of beans in official stocks as of September, the
lowest on record, the agriculture ministry said Wednesday (Brazilian producers seem to take advantage of higher prices to export as much as they can), in the meantime ICE certificated coffee stocks stands at an healthy 4.513 million bags level (suggesting US roasters are waiting for lower price to buy). Monday morning ICE December coffee futures are down sharply at -5%: it seems that some rain in San Paulo during the w-e forced some speculator to sell: in an extremely long spec market stops can be hit resulting in sharp sell off like this morning.

Thursday, October 11, 2007

Coffee Market update for Oct 11

After Tuesday dip to 1,33 today December ICE Arabica coffee futures rebounded up to 1,39 in the opening session and is hovering around 1,385 at mid session up 3.5% from yesterday. Coffee traders are still closely monitoring weather for Brazil's October blooming: Sao Paulo state could get light rain of up to 3 millimeters this weekend, Northern Parana 6 millimeters this weekend with more on Monday and Tuesday. By Oct. 19 should be rainy in northern Parana, Sao Paulo and in south Minas Gerais. Brazilian trees in their first three years of production are under stress from current dryness, while adult trees more than four years old -which make up the majority – may be more resilient, especially those planted above 900 meters. Traders report that dry weather may shaved as much as 10% off forecasts for the expected giant Brazilian next crop of 55 million bags (with peaks of 20% in some regions): some however say that a 50 million bags level may still be reached in Brazil's new crop unless rainfall does not materialise soon, in which event the crop may suffer additional significant damage. The Brazilian CNC (Conselho Nacional do Café) warns that estimating the potential damage of 2008/2009 crop at this stage is still pure speculation, there will be some reduction but it is still too early to figure out the size. The president of CNC added that an exact assessment of the next crop figures can be done only in January. Tomorrow COT data will shed some light on market participants positioning: I will closely watch the speculator net long position to assess whether the current high coffee prices may be sustained or not: should net long spec positions increase, the market will be more vulnerable to another severe correction at the first rain in Brazil in my opinion.

Wednesday, October 10, 2007

Coffee market update 10-oct

Arabica coffee futures fall yesterday as speculators took profits and the market run into trailing sell stops ater December failed to reach a target at $1.41 on Monday. Growing uncertainty abou the weather forecast and hence over the size of the next harvest are the key factors determining the market direction. Weather conditions remain dry, while the forecast calls for some light showers over the weekend. Yesterday the market reacted negatively to talks of possible rainfall in Brazil's top growing regions. If persistent rains fails to materialize today's pull back might proove to be shortlived, however one should remember taht the market is still very long and may be vulnerable to any talk of rain in Brazil.

Monday, October 8, 2007

Coffee market action Oct-8

NY Arabica Coffee (December) future touched an intraday high of 139.9 and settle at 138.75.
The market opened sharply higher and got close to the contract high of 141 but closed in the session's mid-range.

San Paulo Arabica Coffee (December) future touched an intraday high of 169.7 getting very close to the contract high of 170 but closed in the session's mid-range around 168.

Traders continue to watch weather forecasts in Brazil coffee-growing regions: the market is long and near to its contract highs and 10 years highs, the next sessions wil likely see increasing volatility: the market could break the next resistances and set new contract highs as well as could be caught by surprise and sell off if rain arrives in Brazil and forces spec longs to reduce their long holdings (Spec long positions are close to historical highs accordingly to the latest COT report released last Friday).
Readers of Value Area Trading Newsletter will receive soon by email a market and strategy update on December Coffee Futures.

Brazil Weather in Key Coffee regions

The lack of rain in the Brazilian coffee regions is worrying Brazilian coffee growers. In South of Minas Gerais, for example, in August never rained. Every day without rain make a tough situation even tougher. Plants situated below 900 metros were unusually flowering in August as consequence of rainy months of June and July and are now badly suffering for the lack of rain. Plants that usually flower in Sept-Oct-November are suffering a significant water deficit. Production potential of 2008/2009 crop is at stake although it is early to assess size of the potential loss. If rains finally arrive, 2008/2009 crop can still be a good harvesting season but it will not turn out to be a record crop season as initially expected. In this situation the market is closely following weather conditions in Brazil and Arabica coffee prices are touching 9 years high levels both in San Paulo and NY.

Monday Oct 8, 2007 bulletin: weak and localised rain areas in North of Paraná and São Paulo State. Significant rain able to cover the coffee water deficit is not expected . In Minas Gerais and Espírito Santo weather is expected to remain dry till Oct 14. Weather forecast are changing day after day and need to be continuously monitored. Forecasting models expect significant rain in the Coffee producing regions from October 18.

Sunday, October 7, 2007

Brazilian Coffee

Brazil is the world biggest coffee producer: during Crop year 2006/2007 Brazil produced 42 mios of 60kg green coffee bags.

The chart below shows the historical production of Brazil over the last 30 years.

Accordingly to the latest CONAB figures Brazilian 2007/2008 crop is estimated at 32,62 million bags. The low Brazilian production of 2007/2008 has contributed to this year global deficit of Coffee and to the increase in coffee prices. The weather condition and rain levels in key Brazilian producing areas during this month and the next are gathering a lot of attention to assess the potential for 2008/2009 crop.

Which are the main producing regions of Brazil? Vast plantations of millions of trees cover the hills of south-central Brazil, as shown in the chart below, Minas Gerais, Espirito Santo, Sao Paolo are the key producing areas accounting for 90% of the total production.

Brazil coffee cycle: the harvesting period is June-July-Aug and the blooming (flowering) period is Sept-Oct-Nov. Coffee trees need sustained rains during the latter part of September and October to promote flowers, which mature into coffee beans. Any rain that is interrupted by dry periods or a long dry spell will actually damage the crop, these days coffee growing areas are in critical situation and need rain to improve humidity level otherwise 2008/2009 production could drop. The trees can tolerate up to 150mm moisture deficit (some area have now a deficit of 300mm) and some producers and authorities are worrying and waiting for some rain.

Saturday, October 6, 2007

Coffee futures: an historical perspective

Over the last 20 years coffee supply and demand have never been balanced producing wild prices swing and volatility in the coffee market: below the historical price of the nearby coffee futures contract traded on the NYBOT (Arabica coffee).

A situation of oversupply kept coffee prices very low for the beginning of the nineties, tighter supply conditions in 1993-1994 lifted the prices from 0,5 per pound to over 2 USD per pound.

A price spike up to 3 USD per pound in 1997 due to supply disruptions was followed by a 5 years of bear market driving the prices as low as 0,45 per pound in 2002 (the so called coffee crisis).

The rising production of Brazil and the rapidly growing Vietnamese supply kept the priced depressed till 2004. The chart below shows the annual production (in 60kg bags) of the three main coffee producing countries.

The oversupply condition that depressed the coffee market for almost 10 years has recently been removed from the market thanks to rising coffee demand in the importing countries and slowing supply rates of growth in some producing countries. Prices have now returned to over 1,3 per pound (the highest level of the last 9 years), however the effect of the weak dollar have reduced the benefit of higher dollar prices of coffee for most of the producers. The chart below shows the annual consumption (in 60kg bags) of the three main coffee consuming countries.

Production and consumption data on green coffee (source FAO) in the chart below show the contraction of the world surplus of coffee that has driven prices higher over the last few years.

Main Coffee Consuming Countries

Among Coffee importers the main consuming Countries are USA, Germany, Japan and Italy.
Dynamics of coffee consumption and imports in tose countries are very important to assess world coffee demand trends.

2006 Coffee production

Most reliable source of information for coffee fundamentals is the International Coffee Organization (ICO). Accordingly to ICO official figures the 2006 World Coffee Production was 121 million bags (60Kg each). The main producer was Brazil (42,5 million bags) followed by Vietnam (15 million bags) and Colombia (12 million bags). The chart below shows the 2006 production breakdown by producer.

Friday, October 5, 2007

Coffee Introduction

Coffe is flowering native to subtropical Africa and southern Asia. Seeds of this plant are the source of a stimulating beverage called coffee. The seeds are called "beans" in the trade. Coffee beans are widely cultivated in tropical countries in plantations for both local consumption and export to temperate countries. Coffee ranks as one of the world's major commodity crops and is the major export product of some countries. Coffee is one of the most valuable primary products in world trade, in many years second in value only to oil as a source of foreign exchange to developing countries. Its cultivation, processing, trading, transportation and marketing provide employment for millions of people worldwide. Coffee is a traded commodity on major futures and commodity exchanges, most importantly in London and New York.

There are two main species of Coffee that may be grown for the beans: Arabica Coffee is considered to have the best quality while Robusta Coffee is grown on land unsuitable for Arabica. Coffee is cultivated in Latin America, Southeast Asia, and Africa.

Robusta Coffee main trading centre is London while Arabica Coffee trading centres are New York and San Paulo. The futures market analysed in this blog is the NYBOT Arabica Coffee Futures.

A coffee tree can grow fruits after 3–5 years, for about 50–60 years.

Brazil is the largest coffee exporting nation, but in recent years Vietnam has become a major producer of Robusta. Robusta coffees, traded in London at much lower prices than New York's Arabica, are preferred by large industrial clients, such as multinational roasters and instant coffee producers, because of the lower cost.