Weekly Coffee Perspective – August 18th to 11nd of 2014 – Week 34

Market watching closely the weather again

World stocks rallied strong in the last days on easer concerns over eastern Ukraine fight and continuous belief from investors that expansionary monetary policy will be around for some time.
Today Russian and Ukrainian foreign ministers met in Berlin to discuss the situation and a potential truce, calming down the markets after some trucks sent by Russia into the rebel area last week were stricken by Ukrainian army (which alleged the content of the cargoes had more than “humanitarian goods”). The geopolitical scenario looking a little less complicated overshadowed even the zero growth GDP in the euro-zone economy in the second quarter of the year The three major commodity indices lost ground in the last fortnight with the CRB trading at the lowest level since February, the BCOM (ex-DJAIG) trading at the levels of January, and the SPGSCI at figures last seen back in April 2013.
Among the components of the SPGSCI, only cocoa, nickel, gold and corn had gains, respectively 2.00%, 0.92%, 0.90% and 0.56%.
The worst performers were: lean hogs -18.75%, soybeans -9.49%, zinc -4.25%, live cattle -4.25%, sugar -3.92% and copper -3.65%.
NY coffee is virtually unchanged since our last “Coffee Perspective” (I was out on “sensitive leave”) while London lost 52 dollars per ton.
Arabica prices have recouped losses during this period, hesitating to give away a built-in premium on the potential lower production for 15/16 Brazilian crop with market participants following close the forecast for rains in the coffee-belt.
Fundamental Focus: Pictures of flowering in the Cerrado area in Brazil, homeland of one of the best qualities in the country, started circulating, bringing doubt about the capacity of the trees to hold the flowers. At the Varginha surrounds, South of Minas, it was also reported some isolated flowering, which again further rains are needed to fix the flowers.
Weather institutes do not see significant precipitation for next week while for a more extended forecast (less precise, or more subject to changes) Somar said that “a cold front and low pressure areas will bring rainfall to coffee zones  from Parana to southern of Minas.” It seems to me that chances of precipitation for the end of the month could discourage new fund buying for now. On the other side the bulls might try to stop the new shorts placed by non-commercial, which are not much but given the low outright volume that the “C” is trading might be enough to spike prices a little.
The question will be if rains just start by mid-September/early-October, a battlefield that divides the opinion of players.
Some say that the trees will not suffer further losses if rains arrive during the regular beginning of the “wet season”, while others say that it does compromise more given the drought the plantations went through at the first quarter of the year. To be seen.
Meanwhile inventories in consuming countries are building up higher as the GCA showed the increase of 386,860 bags in July to
6,042,664 bags – the highest level in nine years. In Japan June stocks went up as well, to 3,091,317. Exchange-certified stocks though are not going in the same direction as LIFFE certs are back to last year’s levels, 1,368,328 bags (up 103,300 in two weeks ending on August 4th), while ICE stocks are at the lowest point since November 2012, or 2,410,363 bags.
The “buffer” number of bags seating closer to final users, the near historical low differentials being offered by exporters, and the robusta/arabica arbitrage at US$ 100 cents per pound are negative signals that give buyers a less sense of urgency to jump the gun. The lack of strength of the basis could be explained by the lack of “demand”, given the summer holidays, which builds anxiety on exporters, but at the same time bulls would like to see more difficulty to source coffee. As for the weakness of robusta prices it can be justified by, again, the higher inventories at the destination, and also by the proximity of the Vietnamese crop, which could be as high as the current one. Regardless, if there is a “shortage of coffee”
at the end of the day robusta should not stay too much behind the rally, as it is coffee and we have seen back in 2010/2011 that the beans find a way to be used when the arabica is pricy or scarcer – no?!  There is a disconnection between the stories that fill the terminal and the physical traders, therefore the traders have been focused on rolling their position before first notice day, and outright prices have gravitated around 190.00 cents.
Technical Focus: The “C” was able to hold above 185 (December contract) on the quick-dive it had last week. Today it broke Friday’s high and settled unchanged. If you draw a line from April 23rd high, through the highs of July 31st, August 4th and 5th you will get a resistance that tomorrow is at 195.70. Then the next upside objectives will be 200.00 and 211.10. Support levels are at 188.30, 185.30, 183.60 and then 180.00. Robusta November chart looks weak and poisoned to test the 1900 area, then the 200-moving-average that today is at 1898. A move above 2003 and 2010 would be the initial steps to change the negative trend.
Have a nice week and good trades.
Rodrigo Costa

In a few words: The first notice day of ICE September contract this Thursday has concentrated the activity in the last week on the spreads. Sep/Dec widening to -4.40 cents, along with a wide arbitrage of London/NY, and differentials that do not get strong at the origins are negative signals to contrast with the chart that still looks positive for the “C”. Fundamentally there are some rains expected for the end of August, which is far away and can change quickly, but at the same time might discourage new buying into this market. The death of the presidential candidate Eduardo Campos in Brazil last week will change the perspective of Dilma to be re-elected in the first-round, which practically means a strong local stock market (as seen with the Petrobras paper) and a Brazilian Real that the opposition says will be free to flow without intervention – meaning a weaker currency down the road given the economic condition of the country.

Rodrigo Corrêa da Costa
www.newedge.com