Good day. Welcome to this edition of the DRWakefield Fortnightly Market Report. This fortnight we’re covering the period Monday 15th May to Friday 26th May.
This report touches upon the Arabica and Robusta coffee futures market, currency pairings and news from origin. See our Market Report Terms page for clarity on any terminology in the coffee market report below.
NYC Movement
Monday 15th of May opened at 182.75 c/lb and closed 6.55 c/lb higher to finish the day at 189.40 c/lb, sparked off by a cold front predicted to arrive into Minas later in the week and fuelled by spec buying activity. A choppy few days of trading followed and the week closed out at 192 c/lb. Concerns about Brazilian weather continued to add volatility into the market but this is typical for this time of year as we approach the winter period in Brazil.
The next week was rather bearish. As you can see from the graph, every day was red! We opened the week at 191 c/lb and we closed at 181.60 c/lb, with 5 bear days in a row getting us there. On Friday we hit the fortnightly low of 180.30 c/lb, but we could not breach the psychological barrier of 180 c/lb. Risk aversion in the macroeconomic scenario put pressure on the commodity complex in general, with coffee following its other peers in the commodities basket. The Dollar Index strengthened amidst all the uncertainty regarding the US Debt Impasse (more on that later) and the previous week’s fears over poor weather dissipated, all giving food to the bears
COT & certified stocks
In the CFTC’s COT report with the cut-off Tuesday 16th May Commercial length was trimmed marginally with the Gross Long position falling by 543 lots to total 53,208 lots overall. There were 947 lots of new Gross Shorts as we head towards the hedge flow of the new season Brazil crop.
The CFTC’s COT report with the cut-off Tuesday 23rd May saw the non-commercials increase their net long position by 2,019 lots to total 14,897 lots Net Long.
Certified Arabica stocks have fallen to their lowest level in 6 months. Last Friday, ICE-certified stocks dipped to 598,000 bags, representing a 12% reduction over May and a 27% reduction over 2023. As Brazilian differentials ease, we should see more coffee coming to the board as new crop rolls in but till then, we will likely not see this number increase much.
Robusta
London opened Monday 15th of May at 2,426 $/mt and continued its bull run into the distance. The fortnightly (and 11 year) high was 2,631 $/mt on the 23rd of May but the market could not hold that level and instead closed at 2,557 $/mt. The fortnight closed at 2,574 $/mt, 148 $/mt up from its opening 11 days prior.
Origin
Over the past few weeks, the USDA has been releasing crop figures on coffee-producing countries and while most have been released, we are still waiting for their Brazil report. This will be the firm’s first official forecast for the 2023/4 crop. Their other reports show that most countries point to increases in production save Guatemala, India and Indonesia.
Much attention always rests on Brazilian crop figures and rightly so. However, as you can see from the chart below, be careful who you listen to as currently, the gap between the highest and lowest estimates adds up to more than 20 million bags (this represents more than the entire production of Colombia) so it’s always good to take an average of what the many forecasts are saying.
Indonesia is an origin famed for its unique Giling Basah processing and is also famous for the volatility of its coffee market; the past few years have been no exception here. During Covid Indonesia coffee plummeted in price and for a brief period, Sumatra Mandheling was as cheap as chips (historically speaking) and Mandheling Grade 1 FTO was at minimum pricing. However, that was then. Since pricing started climbing it’s been a stairway to heaven for Indonesian producers with pricing at mighty high levels. While this pricing is welcome for farmers who have had a tough covid with increases in production (especially fertiliser) it has started to have a negative effect on demand for Indonesian coffee, and this is most observed with Sumatran coffee. It’s famously difficult to substitute Giling Basah due to its special flavour profile but due to sky-high prices many roasters have either significantly reduced the % of Sumatra coffee in their blends or have gone for another origin entirely. Prices will of course abate at some point but will the demand still be there? That’s the question currently on the minds of many coffee folk. This is not just the case with Arabica as Robusta pricing is at historic highs in Indonesia.
Talking of volatility, doing business with Peru has been a rocky road of late. The country has faced political unrest, scandals, an impeachment of their president, and that’s just the non-coffee challenges. It’s a tough job for Dina Boluarte, the first female president in the country’s 201-year history, and we hope she can bring some stability to normal Peruvians. Access to credit has been tough this harvest for Peruvian cooperatives as many lost a great deal of money last year and banks are worried. While the coffee price was high and many producers did benefit from this, many cooperatives lost money as differentials continued to climb as the season progressed so when cooperatives came around to collecting coffee for their contracts, they had to pay more to cover their physical to honour the contracts they had made. With the change in Fairtrade rules, less access to finance, and a high New York market coupled with cooperatives’ hesitancy around overselling, business has been choppy this season. Many importers and roasters had defaults last harvest so there is hesitancy on both sides and we estimate a smaller % of this crop has been sold compared to this time last year.
Currency & Macro Outlook
Well, last time I wrote this report we talked about inflation, bank crises, US debt, and some positive news about UK growth figures. The news was not that positive but it felt necessary to throw in some positivity lest we all get too depressed about all the negative news! For this report, US debt steals the show. And there are some positives and negatives to that.
It all boils down to debt ceilings and defaults. Could the US government feasibly default on its debt obligations? Well, it would not be the first time this has happened.
The debt ceiling is the limit to the amount the US treasury can borrow and is set by Congress. When that limit is reached, you either have to start paying down your debt or increase the limit to fund the ever-growing payment obligations. The fact that Congress sets the limit means that whenever the US gets close to the limit, the issue becomes a political nightmare with Republicans and Democrats warring over it, with one party wanting the other to look bad. A factor that further complicates the issue is that Congress (the Federal Government) has already committed to spending a certain amount of money so the Treasury is not asking for the ability to spend more, it’s asking for the ability to pay for what Congress has already spent.
This strange situation where Congress has already spent the money means the politicians inability to come to an agreement is even worse. The US operates in a perpetual deficit so the Treasury must borrow more each year to meet the country’s obligations and this borrowing only leads to a higher deficit. Rather than address the underlying spending problem there is always this fight about raising the debt ceiling. After some fighting, the ceiling is raised, and the can is kicked down the road for someone else to deal with.
What was the good news I was talking about? Well, last Saturday U.S. President Joe Biden and top congressional Republican Kevin McCarthy reached a tentative deal to suspend the federal government’s $31.4 trillion debt ceiling, ending a months-long stalemate. Armageddon has been avoided (or postponed?), but the underlying problem is not fixed.
Why so much attention on this? How the US deals with its debt challenge will likely affect the strength of the Dollar in the long term so it’s definitely something to pay attention to. During this fortnight’s reporting period we saw the Dollar strengthen against both the Pound and Euro from 1.252 to 1.235 and 1.087 to 1.073 respectively. Even though people are worried about the US’s ability to pay off its debt, the Greenback is still seen as a safe haven to park your cash.
We hope you enjoyed this report. Till next time coffee folks!
FX Data
The DRWakefield Fortnightly Coffee Market Report focusing on the futures market, currency pairings and news from origin.
