01.06.2023 – The bulls need a good cup of coffee first: Contrary to the general trend in soft commodities, the price has recently dropped. We explain the background.
This is what a nice, albeit short-term bearish downtrend looks like, here the four-hour chart of Arabica in cents per pound. However, the question is whether the recent price action is a knock on the upper end of the channel, or a run-up to a breakout.
Source: Bernstein Markets GmbH
Arabica rallied yesterday as the Intercontinental Exchange (ICE) cited inventory levels at affiliated dealers of around 592,000 bags, a six-month low.
Strong exports in Vietnam
The Robusta variety, on the other hand, came under pressure from news last Sunday from Vietnam, with the General Department of Vietnam Customs reporting that coffee exports rose 15.7 percent month-on-month in May, according to financial blog Barchart. Which more than offsets a 2.2 percent decline in exports from January to May. Vietnam is the world’s largest exporter of Robusta beans. The USDA Foreign Agricultural Service (USDA FAS) had also recently stated that Vietnam’s coffee harvest in the 2023/24 season would likely increase by 5 percent to 31.3 million bags.
The two varieties usually run pretty much in unison – when one becomes cheaper, traders focus on it, therefore demand dwindles for the other, dragging prices down. So let’s look at the current global facts in the coffee market.
Good harvest conditions in Brazil
The determining price factor is, of course, agriculture. Brazil, for example, reported an accelerated harvest due to dry weather. The weather service Somar Meteorologia reported zero rain for the previous weekend in the Minas Gerais region – the growing area accounts for around 30 percent of the Brazilian harvest. The weakness of the Brazilian real is also bearish for coffee because it stifles nationwide consumption and increases the incentive to export.
Recently, the U.S. Department of Agriculture had also given fodder to the bears. According to the report, Colombia’s production would pick up by 2 percent to 11.6 million bags in the 2023/24 season. Colombia is the world’s second-largest producer of arabica.
Indonesia and El Ninio
Meanwhile, the market is threatened with increased unwinding of long positions, according to financial blog Barchart. That is, speculators could throw in the towel because the price is going against them. Last week, the weekly Commitment of Trader’s (COT) report with about 43,000 net long positions as of May 23, a 16-month high.
A glimmer of hope for the bulls: Robusta production in Indonesia is likely to slump by a fifth to 8.4 million bags in the 2023/24 crop, according to USDA FAS. Heavy rains, in fact, prevent pollination of the plants, it said. Indonesia is the third largest producer of Robusta.
Now, eyes are turning to the El Ninio weather phenomenon – this could cap production. On May 11, the U.S. Climate Prediction Center raised the probability of the phenomenon occurring from 74 percent a month earlier to 94 percent now. El Ninio could mean too much rain for Brazil and drought for Indian. So keep an eye on the real-time news – Bernstein Bank wishes you successful trades and investments!
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